Hard-won lessons about money and investing(mattcutts.com)
mattcutts.com
Hard-won lessons about money and investing
https://www.mattcutts.com/blog/make-money-investing-tips/
40 comments
>it among 5 stocks that went to 4X, 3X, 3X, 0X and 0X
What stocks?
What stocks?
Symbolics was one of the bankruptcies. American Management Systems and Lotus were two of the winners. I've forgotten the others.
I'm at the start of a long career and trying to save sacrificially. I know if i over-save i still have it if i need it, but so far every dollar i have put into savings has been on a one-way trip!
I wonder and worry about how to save up for later in life, and who knows what the political landscape will look like then. In my country inflation has been 2.16% on average during the years I've been alive.
Where can I store my money in a way that I know it will be there later whn I need it?
(I'm a little nervous about the bank, one time I had a court order against my bank account so it was drained, and I was beingpaid by cheque, but even when I took my paycheque to the bank to deposit it, until that debt was paid off i couldnt even take out enough for groceries. I want something that cant be taken away at a whim without recourse. I negotiated a deal with the collection agency for a repayment schedule, but they still drained my account 2-3 times after our agreement just because. Oops!)
I wonder and worry about how to save up for later in life, and who knows what the political landscape will look like then. In my country inflation has been 2.16% on average during the years I've been alive.
Where can I store my money in a way that I know it will be there later whn I need it?
(I'm a little nervous about the bank, one time I had a court order against my bank account so it was drained, and I was beingpaid by cheque, but even when I took my paycheque to the bank to deposit it, until that debt was paid off i couldnt even take out enough for groceries. I want something that cant be taken away at a whim without recourse. I negotiated a deal with the collection agency for a repayment schedule, but they still drained my account 2-3 times after our agreement just because. Oops!)
I live in Australia. Here the interest rate on cash deposits is around 2.75%, or 3.6% for a 180 day term deposit minimum $10,000. Inflation the past few years has been between 2.2 - 2.9%. No point holding money in a bank account or term deposit as an 'investment' - I only hold cash because it's handy to have.
All the books I read on the topic of investment were intended for Australians, so my advice is to read two or three books each on investing in the stock market and real estate, and understanding your countries tax rules as they apply to investors. It has been said that if you read three good books on any subject you should be able to converse with the professions and understand what they're saying.
There probably isn't a place you can put money where a court order won't be able to touch it. Payment agreement before that happens is a good idea, but of course that isn't always possible.
All the books I read on the topic of investment were intended for Australians, so my advice is to read two or three books each on investing in the stock market and real estate, and understanding your countries tax rules as they apply to investors. It has been said that if you read three good books on any subject you should be able to converse with the professions and understand what they're saying.
There probably isn't a place you can put money where a court order won't be able to touch it. Payment agreement before that happens is a good idea, but of course that isn't always possible.
Having time and mind for saving is an excellent place to be. There are no guarantees with these things. As you say the only sure thing is that inflation will destroy significant portion of your savings in only few decades. If you think things in timespans of several years you really should look into investing. This way you don't sit on your money but buy something that generates value and thus will be valuable also in future.
Spread your investment over long time and wide range of different assets and you are as safe as you are going to get.
Usually people suggest passive index funds with low fees to do this in practice. Don't take their word for it but study yourself.
Spread your investment over long time and wide range of different assets and you are as safe as you are going to get.
Usually people suggest passive index funds with low fees to do this in practice. Don't take their word for it but study yourself.
What little advice I can offer. From what I've gathered, there is no sure-fire way to protect your capital from constant things such as inflation and wild things such as economic "incidents", for lack of a better term.
I've lately been thinking that some more reliable means would be to own a "wealth-generating" business. Or a few of them in varied industries, to mitigate risk.
Another method that I've also thought about is antique art and possibly high-quality furniture as well. But that would apply in case of a major war-situation, assuming you could even get those physical items to safety.
I've lately been thinking that some more reliable means would be to own a "wealth-generating" business. Or a few of them in varied industries, to mitigate risk.
Another method that I've also thought about is antique art and possibly high-quality furniture as well. But that would apply in case of a major war-situation, assuming you could even get those physical items to safety.
Indexed Link Gilt's or TIPS (in the USA) can do that
TIPS open up a can of worms that most people probably don't want to deal with, unless the bonds are held in a tax-advantaged account (such as an IRA). Here's the skinny straight from the horse's mouth:[1]
No thanks! Count me out of that one!
As a possible alternative (which has its own problems) there are Series I savings bonds (which also attempt to compensate for inflation). Those have the advantage of:[2]
Form 1099-OID shows the amount by which
the principal of your TIPS increased due
to inflation or decreased due to deflation.
Increases in principal are taxable for the
year in which they occur, even if your
TIPS hasn't matured, so you haven't yet
received a payment of principal.
No thanks! Count me out of that one!
As a possible alternative (which has its own problems) there are Series I savings bonds (which also attempt to compensate for inflation). Those have the advantage of:[2]
Tax reporting of interest can be deferred
until redemption, final maturity, or other
taxable disposition, whichever occurs first.
My previous reply was critical of TIPS. But I didn't offer an alternative. This is a very complicated issue to deal with; there are so many pluses and minuses to all investments.
But here's an alternative to TIPS: Roth IRA or Roth 401(k). You put your after-tax money in there and then you NEVER have to pay taxes on interest or capital gains. No taxes ever again. Of course that's at the whim of Congress. They can always bend you over 20 years from now by changing the law. TANSTAAFL.
But here's an alternative to TIPS: Roth IRA or Roth 401(k). You put your after-tax money in there and then you NEVER have to pay taxes on interest or capital gains. No taxes ever again. Of course that's at the whim of Congress. They can always bend you over 20 years from now by changing the law. TANSTAAFL.
> If you’re an employee working for salary, it’s going to be hard to reach that level of independence. ... You can try to radically lower your financial burn rate, but few Americans have taken that step.
So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.
So many people are quick to dismiss living well within one's means as a way to financial independence. Here's the link to the facts again:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim...
TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.
Well, except for how difficult that is. Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California, this requires living off of 20% of pre-tax income.
As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.
With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.
As an example, to live off $35k/year in SF as a single person (which would be considered modest in tech circles), you'd need to earn $175k/year.
With a family, this gets more unrealistic. Living off $100k/year (combined) would require earning something like $500k/year.
Living on a low percentage of income seems like a great strategy if you're optimizing for dying with the maximum amount of money in the bank.
I think many people in this thread need to consider if that really is the game they want to be playing. I'd think people would be better off maximizing their total happiness. There's research showing that having good memories from the past positively affects momentary happiness in the present [1]. With that in mind, it seems like spending money on great experiences now is a good idea, while excessive saving could be counter productive.
[1]: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%...
I think many people in this thread need to consider if that really is the game they want to be playing. I'd think people would be better off maximizing their total happiness. There's research showing that having good memories from the past positively affects momentary happiness in the present [1]. With that in mind, it seems like spending money on great experiences now is a good idea, while excessive saving could be counter productive.
[1]: http://www.wjh.harvard.edu/~dtg/DUNN%20GILBERT%20&%20WILSON%...
But money don't buy good memories. I have much better memories of camping with friends for near zero euros, than expensive hotels.
Money doesn't buy good memories, but it sure helps finance many opportunities to make them. It's neither necessary nor sufficient, but that doesn't make it highly enabling.
You need to consider the opportunity cost too. While you were camping in the bush, you weren't earning.
I don't know why you were downvoted, your statement is right. For example, if someone have financial problems for some reason and have to work 2 jobs to deal with it, he/she hardly could get out camping with friends.
Money can buy you spare time which you can fill with uncostly memories.
Yea, it's good relationships with people. I'll throw pets in there too. Some of my best friends have been dogs, and cats.(Some might consider this pathetic, but my pets were
important part of my life, and I miss them all. Hell--I don't consider them as pets--they were family members.)
>Living on a low percentage of income seems like a great strategy if you're optimizing for dying with the maximum amount of money in the bank.
MMM/ERE [1][2] are not about maximizing money at all. They are about obtaining only a sufficient level of capital, so that they are no longer obligated to work for income to continue living happily. The numerical value of "sufficient" gets lower as your expenses decrease.
>I'd think people would be better off maximizing their total happiness.
Based on your comments, to you, happiness comes from experiences which require money, which is perfectly fine. Therefore, MMM and ERE are not for you, which again is perfectly fine.
For others who find happiness in experiences requiring little to no funds, MMM/ERE is an exceptional strategy. I would love to spend my days coding, studying chess, reading books, cooking, mentoring youth, and spending time with the small group of people I am close with (I'm rather introverted).
[1] http://www.mrmoneymustache.com/
[2] http://earlyretirementextreme.com/
MMM/ERE [1][2] are not about maximizing money at all. They are about obtaining only a sufficient level of capital, so that they are no longer obligated to work for income to continue living happily. The numerical value of "sufficient" gets lower as your expenses decrease.
>I'd think people would be better off maximizing their total happiness.
Based on your comments, to you, happiness comes from experiences which require money, which is perfectly fine. Therefore, MMM and ERE are not for you, which again is perfectly fine.
For others who find happiness in experiences requiring little to no funds, MMM/ERE is an exceptional strategy. I would love to spend my days coding, studying chess, reading books, cooking, mentoring youth, and spending time with the small group of people I am close with (I'm rather introverted).
[1] http://www.mrmoneymustache.com/
[2] http://earlyretirementextreme.com/
security is a thing. When I went into freelancing I did it easily since I lived so cheaply. My monthly bills were under $1k and I was making an above average wage for software dev in my area.
I knew a guy who wanted to get into freelancing but wouldn't do it because his expenses were too high.
There's happiness, but there's also planning and self control.
I knew a guy who wanted to get into freelancing but wouldn't do it because his expenses were too high.
There's happiness, but there's also planning and self control.
To be fair, you picked one of the world's highest cost of living locations to live in, let alone retire in.
I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.
I'm on track to retire in my thirties, or earlier, here in North Carolina. Not hard at all on a mechanical engineer salary.
Can you explain a bit your strategy? Something like MMM?
Yep, pretty much MMM strategy. I've also incidentally got a bit of bitcoin investment that might be a 'shortcut' if it goes to the moon. Otherwise the slow and steady wins the race.
Except that you don't need to live off $100K/year.
It all depends on what you define as 'comfortably' and how well you are able to control your spending on things you don't strictly need. That way you can build up some capital, make that work for you and relax your spending constraints when you are making more money passively.
It all depends on what you define as 'comfortably' and how well you are able to control your spending on things you don't strictly need. That way you can build up some capital, make that work for you and relax your spending constraints when you are making more money passively.
"in SF" - that is not affordable. If you are trying to save money you live somewhere on the BART or Caltrain and take the train into the city every day. My rent in East Palo Alto the year I was there was $400/month all utilities and internet included, for example. Is commuting into big cities like SF and NYC every day by bus and train miserable? Yes. But thousands and thousands of people do it because it is affordable and they have families or retirement they care more about.
to some degree you're right, commutes are a good way to trade time for rent money. many people don't have that time luxury, sadly, especially if dealing with a 9-5 job, caltrain irregularities and school/daycare schedules. many people don't have an extra 3+ hours to spare each day and necessarily trade that for a rent increase or proximity to a daycare or school. as a current resident of epa, i can say that the rents are becoming comparable with regular palo alto, especially if you're not living alone, which is really when these budget issues become much more complex.
Perhaps that means SF might not be a great place to work in spite of 6 figure salaries.
Work remotely. Get paid a SF salary; live in back-of-beyond, Arkansas. Retire at 30.
haha.
not adjusting your employee's wages based on their work location, which company is that delusional?
not adjusting your employee's wages based on their work location, which company is that delusional?
Why is it delusional? The company should be willing to pay an amount based on the benefit they're receiving. Does a feature developed by someone living in NYC or SF make the company more money than the same feature developed by someone living in Ann Arbor or Atlanta? Offering a premium for people to work on-site versus remotely makes sense. Discounting the value based on expected difficulties with linguistic or cultural misunderstandings makes some sense. But I really don't see why you should be adjusting based on the work location in a more general sense.
wages are not absolute, they vary by location, for the same kind of work. cost of living are taken into account when offering salaries. taxes ditto. this applies to the US as well as Europe.
it is about fairness among workers. there should be no penalty for living close to the HQ or major office hubs, which practically always are in high-cost areas.
counter-example being SAP with Waldorf, but that is ending its lifespan for the inverse reason (no one sane wants to move there).
it is about fairness among workers. there should be no penalty for living close to the HQ or major office hubs, which practically always are in high-cost areas.
counter-example being SAP with Waldorf, but that is ending its lifespan for the inverse reason (no one sane wants to move there).
If you're demanding that the workers live somewhere particular then of course you're going to be paying more when that "somewhere particular" is more expensive. For remote work of comparable quality, it does not make sense to me that it should be adjusted based on where the worker decides to live.
Companies that claim to be desperate for developer talent?
Living really cheaply in SF is really just a question of cheap rent and never eating out. If your willing to have roommates you can get below 1k/month rent making 25k/year living expenses doable.
Granted, Heath issues, dependents, or debt can make this a non starter. But, just because most people you work with spend most of what they make every month means you need to do the same.
Granted, Heath issues, dependents, or debt can make this a non starter. But, just because most people you work with spend most of what they make every month means you need to do the same.
25k / year living expenses still works out to about 40k per year. And you have a lot of room mates. But now if it's only a quarter of your income, you need...
100k / (1 - (0.28[1] + 0.093[2])) = 159,489.
Plus if you retire, you're going to be managing your own health insurance, so the required living expenses number increases, probably by thousands of dollars a year. And it's not like you can flip from a frugal living style to a more flagrant one afterward, so you're going to have to live with room mates for the rest of your life, and never eat out, still.
[1] http://federal-tax-brackets.net/2014-federal-tax-brackets.ht...
[2] http://www.tax-rates.org/California/income-tax
100k / (1 - (0.28[1] + 0.093[2])) = 159,489.
Plus if you retire, you're going to be managing your own health insurance, so the required living expenses number increases, probably by thousands of dollars a year. And it's not like you can flip from a frugal living style to a more flagrant one afterward, so you're going to have to live with room mates for the rest of your life, and never eat out, still.
[1] http://federal-tax-brackets.net/2014-federal-tax-brackets.ht...
[2] http://www.tax-rates.org/California/income-tax
There is little reason to stay in a high cost of living area while retired and even 600$/month can get you a nice place in much of the US let alone the rest of the world with the difference covering health insurance. As to income some people really do make more than 200k/year. And it’s such high income earners where such savings rates really become not just viable, but a reasonable choice.
More importantly the goal is not necessarily full retirement. Plenty of things are entertaining and make some money. Perhaps you only make 5k/year as a writer or painter well on its own that might not mean much but it can easily boost your nest egg over the next 20 years. Or perhaps teach a class at the local collage or even some of those short training classes. Not to mention long shot’s like trying your hand at acting.
PS: Your expenses often rise as you age but even just working 10 years entitles you to some Social Security benefits.
More importantly the goal is not necessarily full retirement. Plenty of things are entertaining and make some money. Perhaps you only make 5k/year as a writer or painter well on its own that might not mean much but it can easily boost your nest egg over the next 20 years. Or perhaps teach a class at the local collage or even some of those short training classes. Not to mention long shot’s like trying your hand at acting.
PS: Your expenses often rise as you age but even just working 10 years entitles you to some Social Security benefits.
>Living on only 35% of after tax income requires you either A) live extremely cheaply or B) make tons of cash. Roughly speaking, in California...
How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.
How about C) Move to a different state? If the goal is to do this in California, then yes, it's probably not possible.
>Assumptions:
>– You can earn 5% investment returns after inflation during your saving years
This would maybe make sense in the 1990s or early 2000s but it's 2014!
ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.
This would maybe make sense in the 1990s or early 2000s but it's 2014!
ZIRP forever is the new normal, and judging by what happened in Japan post 1991, it's going to continue for at least two or three decades.
You should take a look at stock market returns over the last few years, this year included.
If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.
Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.
> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.
If you purchased shares of a s&p500 index fund at just about any point in history, your net gain will be well over 5% annual growth.
Even if you bought in at the peak of 2007 - the worst time you could have bought in recent history, before the ~35% decline in 2008, if you are still holding on to it today, it's about 6% annual growth.
> by what happened in Japan post 1991 1991 Japan and 2014 United States are no where near similar enough to draw that conclusion. I agree that ZIRP forever is not a good policy - and at some point in the next decade we will feel the results of it, but forecasting three decades of economic stagnation is just silly.
>You should take a look at stock market returns over the last few years, this year included.
This is exactly what scares me about it. It's frothy as hell.
So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.
>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion
Let's see:
1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).
2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)
3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)
4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.
5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).
So far the path has been identical. Hell, we've even gotten plummeting birth rates too.
>forecasting three decades of economic stagnation is just silly.
I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.
Forecasting safe 5% returns is bullshit, anyway.
This is exactly what scares me about it. It's frothy as hell.
So is it a nice safe place to stash my retirements savings where it will yield 5% consistently until I retire? I don't think so.
>1991 Japan and 2014 United States are no where near similar enough to draw that conclusion
Let's see:
1) Huge crash in property prices caused by a debt bubble (us: 2008 / them: 1991).
2) Central bank responds by trying to reinflate asset values in order to make banks solvent again. They drop interest rates to zero and raise them as soon as growth returns which will be very very soon now, honest. (both countries did and said this; both promised it would be temporary)
3) Growth doesn't return. Banks still effectively insolvent and are propped up only by high asset values and extend & pretend. (both countries did this)
4) Central bank perpetually afraid of raising rates in case it causes a sharp economic contraction for which they will be blamed.
5) ZIRP thus becomes the new normal (it's been 6 years so far for us, and 23 years for them).
So far the path has been identical. Hell, we've even gotten plummeting birth rates too.
>forecasting three decades of economic stagnation is just silly.
I don't know how many decades it will be, but "the new normal" shows no signs of ending any time soon.
Forecasting safe 5% returns is bullshit, anyway.
There are other, safer, kinds of funds beside stock funds. It sounds like what you want is a fund holding government bonds. Those are pretty safe, and will probably give you better return than the bank.
US government bonds (ten year, so plenty of short term price risk) pay 2.16%. If you are in Europe, German government bonds pay around 0.8%.
if you consider inflation (1.70% in the US,0.60% in Germany) those interests are almost zero.
If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.
I'm not a finance expert so feel free to show me the fallacies of my reasoning!
If you have 1M$ and want to live on that, and you're good enough to live with 25k$/yr, you need to consistently "extract" 2.5% on that capital, that means you need to consistently get 4.2% every year. And this exposes another issue: even if you have a safe investment that can give you 4.2%/yr on average, that's not steady, so if some years are bad (or really bad) you need to eat into the capital. If these happens for too many years in a row, the capital could be reduced enough that you need to get higher earnings to counterbalance that.
I'm not a finance expert so feel free to show me the fallacies of my reasoning!
> I'm not a finance expert so feel free to show me the fallacies of my reasoning!
Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.
Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.
Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".
Your reasoning is sound. And it's actually worse than that - the reported inflation in the US (CPI) vastly underestimates realistic costs of living. I would assume that's true in Germany and the rest of the world as well.
Officially, it is 1.7%. However, that includes hedonistic adjustments (you can buy a TV now for $70 that is equivalent to a $2000 TV from 30 years ago; therefore, $70 today is worth $2000 of 30 years ago; weighted by the relative part of your expenses that go towards buying TVs), "owner equivalent rent", which is a speculation by a sampling of home owners about how much rent they would have paid to live in their own house (are they over estimating? underestimating?), some measures ignore food and energy costs (who needs either?) and other shenanigans that make the numbers easy to manipulate on one hand, and impossible to reproduce on the other.
Unless the majority of your expenses are technology related and unchanging (you still happy with your Apple ][ performance, right?), the CPI is probably closer to 5% per year for a while now. Health, Education, Energy, Food and housing, which are responsible for most of everyone's expenses have been appreciating at a much faster rate than the official "inflation".
you do have to be aware of the effect when QE is unwound which will depress the price of gilts
QE doesn't need to be unwound; bonds can roll off into cash.
you do know that bond prices and the bank rate are linked bank rate goes up bond prices go down - sucks if you lose 20% of your capital that way and that has happened recently
>you do know that bond prices and the bank rate are linked bank rate goes up bond prices go down
Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?
Yes, that is true. But how is the bond price relevant, from the Fed's perspective, if they aren't selling the bonds?
well I think the down side is for the holders ie you and me and our pension funds :-(
you should not unless your close to retirement have much of your pension fund in cash or cash equivelent's.
And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade
And re 5% I have several IT (investment companies) with returns of over 10% pa for the last decade
It would never really make sense. Any investment where you can make 5% after inflation has risk involved. If you're lucky you'll do great. If you're unlucky not so much. "Do you feel lucky punk?" ;-)
1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.
So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.
1999 - 2009 negative real return. Imagine you're the happy dude who retired in 1999 with a family after working for 10 years and diligently saving. Now in 2009 you need to send your kids to school... We also were on the brink of real depression, if that scenario played out you'd be completely wiped.
So basically you need a large buffer than you think you do to account for volatility and rare "tail" events.
You know the stock market has been doing great over the past 3 years, right? Last year I got something like 30%. If you leave your money in money market funds of course you'll get near zero. You need to take some risk.
That's exactly why it's 5%, it's an average of the highs and lows. Right now it might be tricky to earn that (it's not impossible though), but in the early 2000s you could easily make that. With decent investments you can make two or three times what the same money sitting in a high interest bank account will make.
From that link, under assumptions:
"You can earn 5% investment returns after inflation during your saving years"
If I could earn 5% after inflation without risk I could retire today (well, I'd be retired many years ago, if that's what I want to do). The problem is that's simply not possible. If you have a family you can't take the risk of putting all your money in stocks as there can be periods of well over a decade where the real return is negative and you'll run out of money. You need a lot more buffer.
If I could earn 5% after inflation without risk I could retire today (well, I'd be retired many years ago, if that's what I want to do). The problem is that's simply not possible. If you have a family you can't take the risk of putting all your money in stocks as there can be periods of well over a decade where the real return is negative and you'll run out of money. You need a lot more buffer.
It says "during your saving years", which I understand to mean while you are working. This would seem to leave you the flexibility to adjust if your return doesn't meet your expectations (as compared to an assumption of X% return while retired).
And don't have kids.
Having kids doesn't change the math. That's MMM's point in the post. It's all about savings rate. Kids mean it is harder to save 35%, but the math doesn't change.
I'd add that even if you aren't able to live on 35% for 10 years straight you shouldn't fall into the mindset that it's not worth aiming for at all.
Or do, and cut from other areas/don't get on the hoighty-toighty daycare/lessons/private school treadmill. But kids are definitely an expense.
What about rent or mortgage? In most major cities low rent could be easily 35% of after tax income already
Not that I'm recommending it, but this strategy is radically different from the norm, so it will require you to be abnormal. Mortgage @ 35% of net income is the norm.
Unless you earn 3X the median in your area, living on 35% of your salary means living with below average expenses. Whatever your salary, you will probably think normal is normal for your peer group which usually is closer to whatever you earn than median so even if you earn much more than median you will probably be required to be abnormal. Being abnormal is hard to decide.
However you achieve this, it will probably require you to make lifestyle changes that most people like you consider unacceptable. Move someplace cheap. Start a commune in an old mansion with 6 other families/couples. Live in a cabin. Squat. :) Live with your parents. Don't own a car.
Whatever the specific setup, spending 25-35% of your salary is unlikely to be a moderately different from the norm in your peer group. But, also not impossible.
Consider:
(a) Students, broke artists, unemployed and lots of other people do live on very low incomes. It's possible. If you earn the median, then 10-20% of people in your area live on 35% of what you do. Matt mentioned 14k p/a as a grad student.
(b) This is the "find a way" scenario like a startup. Startups may require you to deal with ungodly stress work, 100 hour weeks and do "impossible" things. If retiring within 10 years is valuable to you, it might be worth it.
Unless you earn 3X the median in your area, living on 35% of your salary means living with below average expenses. Whatever your salary, you will probably think normal is normal for your peer group which usually is closer to whatever you earn than median so even if you earn much more than median you will probably be required to be abnormal. Being abnormal is hard to decide.
However you achieve this, it will probably require you to make lifestyle changes that most people like you consider unacceptable. Move someplace cheap. Start a commune in an old mansion with 6 other families/couples. Live in a cabin. Squat. :) Live with your parents. Don't own a car.
Whatever the specific setup, spending 25-35% of your salary is unlikely to be a moderately different from the norm in your peer group. But, also not impossible.
Consider:
(a) Students, broke artists, unemployed and lots of other people do live on very low incomes. It's possible. If you earn the median, then 10-20% of people in your area live on 35% of what you do. Matt mentioned 14k p/a as a grad student.
(b) This is the "find a way" scenario like a startup. Startups may require you to deal with ungodly stress work, 100 hour weeks and do "impossible" things. If retiring within 10 years is valuable to you, it might be worth it.
Depends on how much home you go for; most people buy or rent far more home than they need or can afford. Sure, if you're in the middle of Mountain View or NYC, even the tiniest apartment can be exorbitantly expensive, both in absolute terms and as a fraction of salary (which does not scale to the same degree). Those locales are fundamentally expensive to live in unless you get very creative. On the other hand, in most other locales, if you're willing to live on the high end of "student" rather than on the high end of "professional", while getting paid like a professional, living on a small fraction of your income is quite feasible.
And in any case, there's no sense giving up on the idea completely even if you can't hit the most aggressive savings rate; even if you only save 50% of your income, you can retire after 17 years, which puts you on track to retire in your early 40s instead of your late 60s. Even better, as you progress through your career, your salary will likely increase, but your spending doesn't have to match. 50% of your salary right out of college may only be 25% of your salary later on.
And in any case, there's no sense giving up on the idea completely even if you can't hit the most aggressive savings rate; even if you only save 50% of your income, you can retire after 17 years, which puts you on track to retire in your early 40s instead of your late 60s. Even better, as you progress through your career, your salary will likely increase, but your spending doesn't have to match. 50% of your salary right out of college may only be 25% of your salary later on.
Indeed, "dumping raises into savings" was one of the smartest things I ever did, financially. When I moved from working from a university to working at a mid-sized corporation, I got roughly a 25% pay bump. Every single dollar of that went into savings (fully funding the 401(k) and Employee Stock Purchase Plan, etc.).
This did a couple of things... it kept a lid on living expenses because there was no additional cash, but it also provided an easy way for me to raise my savings every year without having to make too many conscious choices, just by moving every pay raise into savings.
This did a couple of things... it kept a lid on living expenses because there was no additional cash, but it also provided an easy way for me to raise my savings every year without having to make too many conscious choices, just by moving every pay raise into savings.
So I just did the math. I work at a startup in NYC and could probably make more money at $BigCo. I should be able to save %50 of my current salary and be able to pay rent and have a decent daily spend to the point that it's 2AM and I'm furiously recalculating a lot of scenarios. That has to count for something. :)
Mr. Money Mustache will probably tell you to move to a different place[1], saving time and money by reducing the commuting time[2] etc..
NB I neither agree nor disagree with his ideas (still have to decide.. :))
[1] http://www.mrmoneymustache.com/2011/09/28/get-rich-with-movi... [2] http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-c...
NB I neither agree nor disagree with his ideas (still have to decide.. :))
[1] http://www.mrmoneymustache.com/2011/09/28/get-rich-with-movi... [2] http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-c...
By my calculations, it's generally much better to live in a high-cost area while earning a high wage, than to live in a low-cost area while earning a low wage. This is because a lot of products out there have a fixed cost which isn't based on geography (think iPhones). A higher wage makes it easier to purchase those items.
My calculations differ, though they are probably based on different locations than you used, which changes the numbers.
Median incomes are 75% higher in the high cost area, but housing costs are 200-400% higher, which, being a major expense for just about everyone, quickly erodes any gains you might make on the income side. Services, like internet connections, were also more expensive in the high cost area. Goods like iPhones are the same in both places, you are right, but is actually a larger portion of your disposable income because of the higher living costs.
The one place you might be able to make gains in the high cost area is if you struggle through paying those 400% higher housing costs with the intent of selling your home and moving to a low cost area later in life. Then you can ride that significant equity you have built, assuming the property maintains or increases in value.
That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).
Median incomes are 75% higher in the high cost area, but housing costs are 200-400% higher, which, being a major expense for just about everyone, quickly erodes any gains you might make on the income side. Services, like internet connections, were also more expensive in the high cost area. Goods like iPhones are the same in both places, you are right, but is actually a larger portion of your disposable income because of the higher living costs.
The one place you might be able to make gains in the high cost area is if you struggle through paying those 400% higher housing costs with the intent of selling your home and moving to a low cost area later in life. Then you can ride that significant equity you have built, assuming the property maintains or increases in value.
That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).
That said, my preferred method is to live in a low cost area and work in a high cost area (telecommute).
yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)
I'm thinking about this right in these days, as I'm living and working in a quite rich but expensive country (Luxembourg) where real estate prices (rent&purchase) have grown a lot in the past years, and are still growing (two digits increase of prices yty), while you have surrounding border areas (Belgium, France, Germany) that are way cheaper (half or even less per square meter) but are located 30-40km away with really congested roads or slow public lines (at least 45min per trip, easy to become 1-2hours in case of accidents or traffic jams)
yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)
I'm thinking about this right in these days, as I'm living and working in a quite rich but expensive country (Luxembourg) where real estate prices (rent&purchase) have grown a lot in the past years, and are still growing (two digits increase of prices yty), while you have surrounding border areas (Belgium, France, Germany) that are way cheaper (half or even less per square meter) but are located 30-40km away with really congested roads or slow public lines (at least 45min per trip, easy to become 1-2hours in case of accidents or traffic jams)
> yes but it also depends how you consider in your calculation the costs of telecommuting (costs of travelling, time lost etc..)
Since it seems that English isn't your first language, I thought I'd point out that "telecommuting" means you work from home, and "commuting" means that you travel a long distance to get to work. So, there are no costs or time lost when telecommuting, because you don't have to go anywhere.
The commenter you're replying to is saying he works from home in a low cost area, but works for a company in a high cost area (possibly hundreds or thousands of kilometers away).
Since it seems that English isn't your first language, I thought I'd point out that "telecommuting" means you work from home, and "commuting" means that you travel a long distance to get to work. So, there are no costs or time lost when telecommuting, because you don't have to go anywhere.
The commenter you're replying to is saying he works from home in a low cost area, but works for a company in a high cost area (possibly hundreds or thousands of kilometers away).
you are right I'm not native English speaker so thanks for spotting that, I've always used "remote working" or "teleworking" for describing that, but not telecommuting (maybe because commuting means "travelling to work" and tele means "over a distance", so the compound doesn't make too much sense for me, at least if you don't put a negation somewhere :D)
I think the compound resonates with us because it reminds us of both "telephone" and "telegraph" which work remotely and electronically.
And even if all costs scaled completely linearly with your earnings saving 20% of your income in a high-cost/high-wage are will earn you more money than 20% in a low wage area.
You can always move to the low-cost area when you are ready to stop working.
You can always move to the low-cost area when you are ready to stop working.
So, the optimum would then seem to be to live in a low cost area making a high wage.
It can be done. My wife and I both work remotely and are able to earn significantly more than the average income for our area. She is an hourly engineer and I work as a consultant. We get to live where we want and do the work we want. We could both make significant;y more if we were to relocate, and we have in the past, but we enjoy the lifestyle here and are happy to give up some top end income for quality of life.
I tend to agree. The other point to consider is that if you are (for example) putting 30% of your salary in to a mortgage in a high cost high income area, you will have a much more valuable asset by the time you have paid off your mortgage than you would if you put 30% of your salary into a mortgage in a low cost low income area. In fact you may well have enough equity to fund a nice retirement in a cheaper part of the country.
Houses are pretty cheap, compared to how much money you need to retire.
Also as a rough estimate, most yearly rental prices are 5% - 15% the value of the property. If you get a long mortgage (in the UK, 30 years is pretty common) you can easily pay less per month than you would rent.
>Assumptions
>– You can earn 5% investment returns after inflation during your saving years
At least, in the US this assumption is not valid any longer. There is no risk-free investment that can earn you 5% after inflation annually.
At least, in the US this assumption is not valid any longer. There is no risk-free investment that can earn you 5% after inflation annually.
> TL;DR: Live on 35% of your after tax income and you're retired in 10 years. Get it down to 25% and you retire in 7.
You might as well say:
TL:DR; Move out into the forest and live off the land and you retire today!
Come on, man. 35% of AFTER TAX income? I make good money and I'd have to live like a homeeless man for 10 years in order to do that. While working as hard as I do. That's absurd.
You might as well say:
TL:DR; Move out into the forest and live off the land and you retire today!
Come on, man. 35% of AFTER TAX income? I make good money and I'd have to live like a homeeless man for 10 years in order to do that. While working as hard as I do. That's absurd.
I don't think it's impossible to do it (I think I could be around that but I should run some numbers before confirming that.. and no, I'm not homeless :)), but it's also not that easy to do the calculation: it's easy for rent and maybe other expenses (internet access, bills) but when you go to one-shot expenses like furnitures or cars etc.. I think there's not an agreed methodology on how to split them over the years (5 years ? 10?) so those could easily spoil the maths.
"live like a homeless man" is going to the extreme. But it's either retire in 10 years, or 30.
You need sacrifices to get a reward.
You need sacrifices to get a reward.
Except it doesn't feel like sacrifice after a while.
Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.
I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.
(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).
Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.
Netflix/Cable TV --> reading a book (from the library) or HN. Starbucks --> broaden your horizons and explore the world of "grind your own." Eating out more than once a week --> eating out once a week, and preparing healthy meals the rest. Sometimes having your friends over for dinner. Gym membership --> enjoy looking for new kettlebell and bodyweight exercises that you can do at home. Go for walks with your wife in the evenings, or incorporate walking/exercise into your weekly date.
I'll admit that overseas travel is one area where I still overspend, so this would fall into the "sacrifice" category if I were to cut back. Even so, the skills in frugality that you learn while working your day job are useful on overseas trips. Haggling while jostling with old ladies at a wet market (in a language you don't understand) in order to buy ingredients for breakfast and a packed lunch is an experience that many travelers will miss out on.
(full disclosure: last holiday was a "relax by the hotel pool/private beach" affair. But even then we had a trip to the supermarket to buy some beer, fruit and snacks instead of pay hotel rates).
Anyway, it's not something that happens over night, rather a skillset you work on like any other. You find your own level of "sacrifice," your own groove, that you're comfortable with. Mr Money Mustache is just one guy but there are plenty of people who have entire sites dedicated to the movement who can talk about this idea of "sacrifice" better than I can.
https://www.bogleheads.org/wiki/Getting_started
Short version: Open a Vanguard account and invest >=15% of your salary in the appropriate target date fund for the year you want to retire.
P.S. Where possible, become a millionaire in Google's IPO.
Short version: Open a Vanguard account and invest >=15% of your salary in the appropriate target date fund for the year you want to retire.
P.S. Where possible, become a millionaire in Google's IPO.
Bogleheads is a great resource, but I expect most HN readers can handle managing their asset allocation manually (using a simple "three-fund portfolio" or similar), which allows you to save a bit on expenses compared to a target date fund, as well as take more advantage of tax management techniques like municipal bonds and tax loss harvesting.
This is very true. But for people who know nothing about investing and just want to get started, the simplest non-harmful advice I always give is "Vanguard Target Date Fund". That way, at least they are not doing anything wrong that will serious hurt their returns. Later on, when they have more experience or more money, they might want to switch to some other allocation.
Totally. I give similar advice (although we don't have anything quite as good as the Vanguard TD funds up here in Canada yet). Was just thinking for this particular audience it wouldn't hurt to suggest a bit more effort. Still, nothing wrong with a low-cost TD fund to get started, especially with a portfolio in the 4 or 5 figures.
In Vanguard's case, the TD funds generally make sense starting out given their lower minimum investment requirements ($1000 vs $3000 for most others). Once you reach $10-20k and can starting using Admiral funds, then you can switch to a three-fund portfolio and take advantage of lower ERs.
Have target date funds been successful? The last time I checked, their historical performance (admittedly for only 6-7 years) seemed underwhelming.
If you care about a 6-7 year window, especially the most recent 6-7 year window, target date funds aren't for you. They'll underperform when the market is doing well. They'll also suffer less when the market tanks. Overall, they're a safer investment if you really do have a fixed target date and want to retire close to that date, and thus you have much less tolerance for risk. In particular, they tune for less risk the closer you get to the target date, to limit unexpected surprises.
If you're near the beginning of your career, you don't have a fixed retirement date in mind, and you're investing a substantial enough fraction of your income that you will likely retire earlier than average, then you might want to pick a standard index fund with a fixed proportion of stocks and bonds based on your tolerance for risk, and leave it that way.
If you're near the beginning of your career, you don't have a fixed retirement date in mind, and you're investing a substantial enough fraction of your income that you will likely retire earlier than average, then you might want to pick a standard index fund with a fixed proportion of stocks and bonds based on your tolerance for risk, and leave it that way.
The last 6 or 7 years hasn't exactly been average for historical performance in either stocks or bonds. I'd expect that the target date funds would wind up underperforming in this sort of market, and likely outperform in down markets, especially once you factor in ill-advised market timing/panic changes when the bottom drops out.
[deleted]
[deleted]
> Think about working for equity vs. salary
It's really common for people to drastically overestimate the value of startup equity, or to just not understand the basic mechanics of it at all. In my experience people look at the face value of their options and are pretty clueless about how taxes (or even their strike price!) affect what they might actually wind up with.
It's really common for people to drastically overestimate the value of startup equity, or to just not understand the basic mechanics of it at all. In my experience people look at the face value of their options and are pretty clueless about how taxes (or even their strike price!) affect what they might actually wind up with.
I agree. It's easy for Matt Cutts to say that you should take more equity, because he has only seen massive success. I've been in the Bay Area exactly as long as he has, and I've had 1 company out of 6 where my options actually made me money. The rest were all worthless.
If you're exchanging salary for equity you have to look at taking a job at a startup like an investment decision. I don't know what the broader startup stats are now, but 1 in 6 sounds about average. It means you should negotiate down vesting periods and try and spend a few years at each startup before figuring out if it will succeed or not.
My anecdotal opinion is that more startups are cashing out for at least something because of acquihires and low-end mergers. I had a friend whose startup ran out of money, he accepted a few points of another startup in exchange for the assets of his failed startup and that startup that bought his assets ended up selling for $100M+ after less than a year earning him a decent return.
On another note - it would be pretty cool if someone did the equivalent of an index fund but for employee options. Get together with 5-6 of your friends at different startups and exchange options with each other to hedge the risk.
Another way to diversify your exposure is to get advisory roles at startups and pick up 25-100 b.p from 4-5 different companies for helping them out. This has worked out pretty well for myself.
There are some VCs who will also invest a small slice on your behalf if you introduce them to a deal they end up investing in, which can also work out pretty well if you are able to spot good investment deals, know the founders, etc.
For a culture where stock options, M&A and investing is so prevalent there really isn't much information out there in terms of making the right investment decisions and how to handle and work with money.
My anecdotal opinion is that more startups are cashing out for at least something because of acquihires and low-end mergers. I had a friend whose startup ran out of money, he accepted a few points of another startup in exchange for the assets of his failed startup and that startup that bought his assets ended up selling for $100M+ after less than a year earning him a decent return.
On another note - it would be pretty cool if someone did the equivalent of an index fund but for employee options. Get together with 5-6 of your friends at different startups and exchange options with each other to hedge the risk.
Another way to diversify your exposure is to get advisory roles at startups and pick up 25-100 b.p from 4-5 different companies for helping them out. This has worked out pretty well for myself.
There are some VCs who will also invest a small slice on your behalf if you introduce them to a deal they end up investing in, which can also work out pretty well if you are able to spot good investment deals, know the founders, etc.
For a culture where stock options, M&A and investing is so prevalent there really isn't much information out there in terms of making the right investment decisions and how to handle and work with money.
> On another note - it would be pretty cool if someone did the equivalent of an index fund but for employee options. Get together with 5-6 of your friends at different startups and exchange options with each other to hedge the risk.
This is a pretty cool idea, but you'll have to find a lot of friends for it to work. Chances are, your 5-6 friends' options will also end up worthless. Then again, if we're talking about a pool of maybe 1,000 start-ups, then you need to believe that a diverse bundle of start-ups will outperform the S&P500 on average, otherwise it's pointless.
This is a pretty cool idea, but you'll have to find a lot of friends for it to work. Chances are, your 5-6 friends' options will also end up worthless. Then again, if we're talking about a pool of maybe 1,000 start-ups, then you need to believe that a diverse bundle of start-ups will outperform the S&P500 on average, otherwise it's pointless.
or create a web-based matchmaking market. I think the reason why it may not have happen already is because of regulations shrug - i'll ask the next time i'm speaking to a lawyer
You're completely right that I was very fortunate. All I'm saying is that if your goal is financial independence, it can be hard to get there on a straight salary, and that trying to get some sliver of equity can radically increase your odds of financial success.
With that specific piece of advice, I'm trying to catch folks in Nebraska or Cleveland who are thinking about accepting a 9-5 job, not folks who are already in the Bay Area and familiar with buying a ticket in the startup lottery.
With that specific piece of advice, I'm trying to catch folks in Nebraska or Cleveland who are thinking about accepting a 9-5 job, not folks who are already in the Bay Area and familiar with buying a ticket in the startup lottery.
It does depend even in mature boring companies you can make a nice return I made a fair bit on BT.A and REL (Elsevier)
Of course when I worked for poptel (.5%) I would have been able to retire if we had been brought out by the co-op
BTW in the UK BT 's latest employee 5 year share save returned £60k tax free and that is a scheme available to every one.
Of course when I worked for poptel (.5%) I would have been able to retire if we had been brought out by the co-op
BTW in the UK BT 's latest employee 5 year share save returned £60k tax free and that is a scheme available to every one.
Great point. I'd recommend the book "Consider your Options" when you're accepting a job with stock options: http://www.amazon.com/Consider-Your-Options-Equity-Compensat...
It can be dense reading, but no one cares about your money more than you do, so it's your responsibility to make sure you understand what's going on. Doing that research saved me making more mistakes down the road.
Another common mistake with pre-IPO companies is to say "Wow, I get X thousand options!!" But you have to ask how many outstanding shares the company has. What really matters is what percentage of the company (your shares divided by total outstanding shares) is being offered to you.
It can be dense reading, but no one cares about your money more than you do, so it's your responsibility to make sure you understand what's going on. Doing that research saved me making more mistakes down the road.
Another common mistake with pre-IPO companies is to say "Wow, I get X thousand options!!" But you have to ask how many outstanding shares the company has. What really matters is what percentage of the company (your shares divided by total outstanding shares) is being offered to you.
Exactly--a company I worked for did a stock split that was at least partially rationalized by being able to offer candidates higher share counts. Companies also hand out explainer sheets with their grants that don't really help, inasmuch as they seem to be intended to get you excited about the value of the shares disregarding the exercise price (and the fact that in most scenarios, you're paying normal tax rates on what's left).
I had a friend of a friend quote me the value of his "options package" once (was high six figures), and only after drilling down I discovered this was the amount of ISOs multiplied by his strike price, i.e. a price that he would have to pay up to exercise it.
I once had a VP of Engineering quote me the "value" of my options using that calculation. I declined the offer. Ironically, it was a Lisp startup, and Lispers "know the value of everything and the cost of nothing."
I've seen more than once that in a acqui-hire situation employees are left with very little value in their options and lots of value in their retention package. Not always the case, but it adds to my opinion that equity is really impossible to value.
I'm of the opinion that the stock markets are now inherently unstable, and they will continue to crash every 7-10 years. I'm expecting a market crash somewhere between 2015 and 2017. Most of my money is in cash, but I do hold a few select stocks like AAPL, GOOG and TSLA.
I also believe that the stock market is a game, not an investment vehicle. The nature of the market has transformed every since the day trader, quants and HFT have entered the markets. As long as you understand this, then putting money in the markets is fine. If you don't want to be a part of the game, then regular people should buy bonds (not bond funds, but actual bonds that pay interest).
My opinion is that Wall Street has shifted focus since the 80s to trying to convince people to dump their money, all their money, into mutual funds. Then these massive fund managers take their 1-3% in various fees and just move money back and forth. I don't trust Vanguard any more than I trust any of these other large mutual fund companies, and I happen to know a lot of people that work at various asset management companies in the Bay Area. They print money without ever beating the SP500, instead they try to change the equation by claiming they beat the SP500 on a risk-weighted basis, etc. The entire thing is a sham, and as the OP remarked, why do the mutual fund managers have yachts but none of the clients do? It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.
I also believe that the stock market is a game, not an investment vehicle. The nature of the market has transformed every since the day trader, quants and HFT have entered the markets. As long as you understand this, then putting money in the markets is fine. If you don't want to be a part of the game, then regular people should buy bonds (not bond funds, but actual bonds that pay interest).
My opinion is that Wall Street has shifted focus since the 80s to trying to convince people to dump their money, all their money, into mutual funds. Then these massive fund managers take their 1-3% in various fees and just move money back and forth. I don't trust Vanguard any more than I trust any of these other large mutual fund companies, and I happen to know a lot of people that work at various asset management companies in the Bay Area. They print money without ever beating the SP500, instead they try to change the equation by claiming they beat the SP500 on a risk-weighted basis, etc. The entire thing is a sham, and as the OP remarked, why do the mutual fund managers have yachts but none of the clients do? It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.
> I'm of the opinion that the stock markets are now inherently unstable, and they will continue to crash every 7-10 years.
When you say "now," are you referring to the period from when financial markets were discovered until the present? Or some more specific period? As far as I knew, boom and bust are not exactly new developments.
When you say "now," are you referring to the period from when financial markets were discovered until the present? Or some more specific period? As far as I knew, boom and bust are not exactly new developments.
I'm not talking bear markets, I truly believe there will be 50%+ drops every 7-10 years, which is something that you wouldn't expect pre-2000, except 1987. I think the stock market is a battle ground for amoral participants who are willing to break the stock markets in order to make as much money as they can, and the NYSE and NASDAQ don't seem to care.
So buy shorts.
I will when the time is right. Right now, I'm long.
I agree with your posts except for a couple things:
- Most asset managers will try to rip you off, but Vanguard's culture and alignment with your interests makes them a different/better company than anyone else I know of.
- I don't know if you were joking when talking about buying shorts, but it's really hard to time the stock market.
Actually, if there really is a 50% drop every 7-10 years, I'd be very surprised if you couldn't make a killing buying cheap, far-out-of-the-money shorts.
You can't make a killing that way.
In general, the market can stay irrational much longer than you can stay solvent. To win, you basically need more information (in the shannon information theoretic sense) than the market, on average, does. And when you actually compute it, "50% drop every 7-10 years, and not even with 95% certainty" is negligible information.
Shorts and short equivalents are either effectively marked to market (e.g. futures are marked daily, short-sales are effectively as well through margin adjustment) or have a limited time horizon (liquid puts are 3m-6m, illiquid ones can be a couple of years, but with a ridiculously large premium).
Let's say a drop of 50% happens over 1 year - then your 3m/6m "50% drop" puts don't actually net you any money, because it only drops 30% in 6 months. But they keep costing you all the time.
And if you use futures/forwards/short-sales, you might (and often will) get margin called and squeezed on earlier appreciations. Unless you have a really large margin, which -- when you actually earn some money, if ever -- significantly reduces your earning in percentage terms.
In general, the market can stay irrational much longer than you can stay solvent. To win, you basically need more information (in the shannon information theoretic sense) than the market, on average, does. And when you actually compute it, "50% drop every 7-10 years, and not even with 95% certainty" is negligible information.
Shorts and short equivalents are either effectively marked to market (e.g. futures are marked daily, short-sales are effectively as well through margin adjustment) or have a limited time horizon (liquid puts are 3m-6m, illiquid ones can be a couple of years, but with a ridiculously large premium).
Let's say a drop of 50% happens over 1 year - then your 3m/6m "50% drop" puts don't actually net you any money, because it only drops 30% in 6 months. But they keep costing you all the time.
And if you use futures/forwards/short-sales, you might (and often will) get margin called and squeezed on earlier appreciations. Unless you have a really large margin, which -- when you actually earn some money, if ever -- significantly reduces your earning in percentage terms.
[deleted]
One of the nice things about Vanguard is that the fee structure is much less than 1-3% for many of their funds. I invest with them in some of their index funds and pay no more than 0.4% in fees; usually much less than that.
Vanguard is owned by their funds, so incentives are aligned with the shareholders of the funds. They are very different than most fund companies.
That's a bit of a gimmick. Management still pays themselves from the % of invested funds, not fund performance. Same issue as with a nonprofit -- the corporate profit structure is only one source of moral hazard.
Their expense ratios are really low. Wellington, an actively managed fund, has an expense ratio of .25%. Their non-actively managed funds, such as the Index500, are under .2%. Those are very low fees compared to other similar investments. To compare with doing it yourself, at retail trade rates, that's about one potential trade per year per $2-3k invested.
Vanguard actively moves clients from their baseline funds to the lower cost/higher minimum Admiral versions.
I just don't see moral hazard in Vanguard, compared to other financial firms with remotely similar capabilities and offerings.
Vanguard actively moves clients from their baseline funds to the lower cost/higher minimum Admiral versions.
I just don't see moral hazard in Vanguard, compared to other financial firms with remotely similar capabilities and offerings.
Edit, but too late to actually edit --
The expense ratio of Admiral Index 500 is .05%, not .2%. So even better than I'd remembered.
The expense ratio of Admiral Index 500 is .05%, not .2%. So even better than I'd remembered.
I watched a good documentary about this a while back.
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/
>I invest with them in some of their index funds and pay no more than 0.4% in fees
The fees for VTI, which is Vanguard's Total Stock Market Fund is 0.05%.
On top of that, in Canada, most brokers will allow you to buy ETFs in a RRSP or TFSA account for no fees. Very cost efficient.
The fees for VTI, which is Vanguard's Total Stock Market Fund is 0.05%.
On top of that, in Canada, most brokers will allow you to buy ETFs in a RRSP or TFSA account for no fees. Very cost efficient.
> I also believe that the stock market is a game, not an investment vehicle.
So beat the day traders, quants on their own game. You dont have to trade daily, just buy stock of a good company at a reasonable price and sit back. Once you have invested in a good company then the next step is not to do anything foolish, like selling your shares just because the company had a bad quarter.
Have you read Ben Graham's Intelligent investor, if not, you should.
So beat the day traders, quants on their own game. You dont have to trade daily, just buy stock of a good company at a reasonable price and sit back. Once you have invested in a good company then the next step is not to do anything foolish, like selling your shares just because the company had a bad quarter.
Have you read Ben Graham's Intelligent investor, if not, you should.
> I'm expecting a market crash somewhere between 2015 and 2017.
And so does everyone else who tracks the markets, exactly because markets exhibit inherently cyclic behavior and because they haven't been down in a while. An easy-peasy prediction to make.
And so does everyone else who tracks the markets, exactly because markets exhibit inherently cyclic behavior and because they haven't been down in a while. An easy-peasy prediction to make.
Not only is it easy to make there is no downside to making it. If the markets don't turn down then, he can claim that they will in a couple more years, or the fed is juicing the stats, or something else.
What would be more compelling would be a screen shot of his portfolio that shows that he is much more invested in short positions than longs, or has moved his investment into something besides equity markets.
What would be downright highly profitable for him, is if he could show over a long series of years that his ability to "imagine" future market conditions outperformed a strategy of just buying the market over the highs and lows and averaging the return.
What would be more compelling would be a screen shot of his portfolio that shows that he is much more invested in short positions than longs, or has moved his investment into something besides equity markets.
What would be downright highly profitable for him, is if he could show over a long series of years that his ability to "imagine" future market conditions outperformed a strategy of just buying the market over the highs and lows and averaging the return.
> It's because they make their money from the hundreds of billions of dollars they skim off the top of their customer funds.
The movie Trading Places nailed this, albeit in the context of commodities rather than stocks. But the principle is the same:
The movie Trading Places nailed this, albeit in the context of commodities rather than stocks. But the principle is the same:
Mortimer Duke: Tell him the good part.
Randolph Duke: The good part, William, is that,
no matter whether our clients make money or
lose money, Duke & Duke get the commissions.
Mortimer Duke: Well? What do you think,
Valentine?
Billy Ray: Sounds to me like you guys a
couple of bookies.
Randolph Duke: [chuckling, patting Billy Ray
on the back] I told you he'd understand.OP remarked, why do the mutual fund managers have yachts but none of the clients do?
It's as frivolous as asking why the executives of Nike have millions but the majority of people who buy Nikes don't.
It's as frivolous as asking why the executives of Nike have millions but the majority of people who buy Nikes don't.
This is a very terrible analogy. Nike is in the business of making shoes. A better analogy would be, why do Nike's customers' shoes fall apart after 1 year, but the shoes of the Nike executives last for several years?
Asset managers are supposed to be in the business of increasing their customers' wealth. However, most customer don't get as wealthy as the asset managers themselves.
Asset managers are supposed to be in the business of increasing their customers' wealth. However, most customer don't get as wealthy as the asset managers themselves.
Hedonic adaptation is the devil. You'd hope/intuit that spending more resources would make you happier, but that's just not the way it works. That said, you can use knowledge of this quirk of human psychology to make you richer and more secure compared to your higher-consuming self, not sacrificing any long term contentment or satisfaction to do it. Here's a more in-depth review of the topic[1].
[1] http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-ad...
[1] http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-ad...
I've been considering moving from holding Vanguard ETFs (one of their Total Retirement funds) over to Betterment or Wealthfront to take advantage of their automated tax loss harvesting.
Does anyone have any thoughts about whether automated tax loss harvesting is worth the 0.15-0.25% fees that the robo-advisers charge?
Does anyone have any thoughts about whether automated tax loss harvesting is worth the 0.15-0.25% fees that the robo-advisers charge?
Probably not worth it unless you have a very large portfolio and you're too lazy to do the tax loss harvesting yourself. It's especially not worth it if you're correctly holding most of your retirement savings in tax-advantaged accounts (401k/403b/IRA/HSA). You are, right?
Also, it's worth noting that Schwab is launching a free robo-advisor service early next year[0] so that may be the nail in the coffin for startups like Betterment.
[0] http://www.reuters.com/article/2014/10/03/us-charles-schwab-...
Also, it's worth noting that Schwab is launching a free robo-advisor service early next year[0] so that may be the nail in the coffin for startups like Betterment.
[0] http://www.reuters.com/article/2014/10/03/us-charles-schwab-...
Thanks for the tip about Schwab, looks interesting, especially the 'free' part.
Thinking about it, basis points feel too expensive for something that's done entirely in software. I suspect competition from existing players will drive the price right down.
Thinking about it, basis points feel too expensive for something that's done entirely in software. I suspect competition from existing players will drive the price right down.
I made a comment elsewhere in this thread, but will reiterate it here: tax loss harvesting only shifts the tax burden to the future. If you put in $100k today (post tax dollars), and tax loss harvesting is able to fully "realize" that $100k, you'll have to pay tax on that $100k when you go to sell it (because the basis will be down to $0).
Yes, you get the potential gain on the difference in your net worth; consider it a loan from Uncle Sam to you until you need the capital. It's a much more minimal gain than it seems, though. The only real place I see tax loss harvesting being a no-brainer is in estate planning for money left upon your death.
Yes, you get the potential gain on the difference in your net worth; consider it a loan from Uncle Sam to you until you need the capital. It's a much more minimal gain than it seems, though. The only real place I see tax loss harvesting being a no-brainer is in estate planning for money left upon your death.
I'll take any interest free loan that I can get, offsetting today's gains to lower my tax bill means more money to invest.
I agree that in many situations tax loss harvesting isn't helpful and even in the best case it's not amazing but if over the long term it can be worth the 50 basis points that the robo-advisors claim then it might be worth paying 15-25 basis points for it.
Hearing about Schwab's entry into the market makes me think that I should at least hold off to see what changes an established broker makes on the robo-advisor market.
I agree that in many situations tax loss harvesting isn't helpful and even in the best case it's not amazing but if over the long term it can be worth the 50 basis points that the robo-advisors claim then it might be worth paying 15-25 basis points for it.
Hearing about Schwab's entry into the market makes me think that I should at least hold off to see what changes an established broker makes on the robo-advisor market.
I like interest free loans, too!
I feel like the services that tout tax-loss harvesting don't do a clear job of explaining that it's only interest free loan if your future tax bracket is the same.
For example, if you're going to be moving to a different state after the tax losses are harvested—say, from MA to CA—then that "interest free" loan will cost you ~5% (the difference in tax rates between those states).
Or, if you're just starting out in your career, and you're going to be in a higher tax bracket in a few years—about the same time that many would start looking at buying real estate—then it's again a cost equal to the delta in marginal tax rates (say, 3% or 8%, depending on how your starting salary compares with your salary 5 years into your career).
I'd love if Vanguard got into this market as well; although it seems like they already are, with their target date index funds. Admittedly, no tax-loss harvesting, if that's important to you.
I feel like the services that tout tax-loss harvesting don't do a clear job of explaining that it's only interest free loan if your future tax bracket is the same.
For example, if you're going to be moving to a different state after the tax losses are harvested—say, from MA to CA—then that "interest free" loan will cost you ~5% (the difference in tax rates between those states).
Or, if you're just starting out in your career, and you're going to be in a higher tax bracket in a few years—about the same time that many would start looking at buying real estate—then it's again a cost equal to the delta in marginal tax rates (say, 3% or 8%, depending on how your starting salary compares with your salary 5 years into your career).
I'd love if Vanguard got into this market as well; although it seems like they already are, with their target date index funds. Admittedly, no tax-loss harvesting, if that's important to you.
Wait till the price drops to 0%
https://intelligent.schwab.com/
https://intelligent.schwab.com/
Schwab is also aggressively pricing their ETFs vs Vanguard, beating them in many cases. Not worth switching, but "Vanguard is Best" isn't the rule either.
[deleted]
FYI, if "tax loss harvesting" is something you'd like to consider, there're companies out there which (for a fee), would do it for you. Their entire business model is to lose money for you, in a smart way. That said, if you need to use this method, you're probably wealthy enough to know how/where to use it.
Honestly IMO tax loss harvesting becomes very straightforward if you have a nice, simple portfolio of index funds. Your entire portfolio will be maybe 3-5 funds, so there really isn't much to keep track of. A few minutes reading the superficial loss rules for your jurisdiction should do it. (Generally, as long as you sell a fund at a loss and replace it with something similar, but tracking a different index, you're fine.)
I added a comment on Matt's blog post but it's waiting moderation so I'll post it here to hear other folks' input.
"Hi Matt, I usually enjoy your posts but I felt this one lacking in a major way.
Investing is something that has huge potential (ie., 100 fold). This is something that I’m sure you’re aware of as an early Google employee (you were invested in the company via stock options, etc). On the other hand, investing has huge downside as well (you can lose all your money).
Many people are advocating people to take a mindless approach to investing by investing in low-cost index funds. I personally think this is decent/good advice for most people who don’t have the time, energy, experience, skills to make investing a lifetime passion. In other words, for the typical person who just wants to focus on his 9-to-5 job and other hobbies and not deal with the world of investing, then sure low-cost index funds are the way to go.
However, there are some people who can benefit in huge ways by becoming experts in investing (whether this be in stocks, real estate, businesses, etc). A few disclaimers first… becoming an expert investor is extremely difficult and most people underestimate what it takes. It’s not about “picking” stocks or getting lucky. Rather, it’s about accumulating the skills, experience and expertise to evaluate investment opportunities in a wise and discerning manner, and to do it exceedingly well. I think it requires an immense amount of time and dedication. And I don’t think 98% of the people out there practically have the time, energy, motivation or focus to develop such skills. But for the 1-2%, I think it’s a possibility if they treat it as a serious lifetime endeavor."
"Hi Matt, I usually enjoy your posts but I felt this one lacking in a major way.
Investing is something that has huge potential (ie., 100 fold). This is something that I’m sure you’re aware of as an early Google employee (you were invested in the company via stock options, etc). On the other hand, investing has huge downside as well (you can lose all your money).
Many people are advocating people to take a mindless approach to investing by investing in low-cost index funds. I personally think this is decent/good advice for most people who don’t have the time, energy, experience, skills to make investing a lifetime passion. In other words, for the typical person who just wants to focus on his 9-to-5 job and other hobbies and not deal with the world of investing, then sure low-cost index funds are the way to go.
However, there are some people who can benefit in huge ways by becoming experts in investing (whether this be in stocks, real estate, businesses, etc). A few disclaimers first… becoming an expert investor is extremely difficult and most people underestimate what it takes. It’s not about “picking” stocks or getting lucky. Rather, it’s about accumulating the skills, experience and expertise to evaluate investment opportunities in a wise and discerning manner, and to do it exceedingly well. I think it requires an immense amount of time and dedication. And I don’t think 98% of the people out there practically have the time, energy, motivation or focus to develop such skills. But for the 1-2%, I think it’s a possibility if they treat it as a serious lifetime endeavor."
Perhaps you're right; perhaps 1-2% of people (if that) could potentially beat the market in their investments. And the majority of people think they're in that 1-2%.
Meanwhile, index funds have the lovely advantage that you can't do worse than the market.
If you have extra energy to spend investigating investments, use it to diversify into a handful of minimal-overhead index funds rather than just one. And if you fancy yourself an investor as a hobby, take a small fraction of your savings and play with it, and congratulate yourself if you manage to do better than "buy high and sell low".
But in general, most people would greatly improve the status of their investments by just throwing the whole thing into a halfway decent index fund. That's the most sensible general advice when talking to a large audience of people; get them there first, which takes far less effort, and then let people who really think they can do better attempt to do so.
Meanwhile, index funds have the lovely advantage that you can't do worse than the market.
If you have extra energy to spend investigating investments, use it to diversify into a handful of minimal-overhead index funds rather than just one. And if you fancy yourself an investor as a hobby, take a small fraction of your savings and play with it, and congratulate yourself if you manage to do better than "buy high and sell low".
But in general, most people would greatly improve the status of their investments by just throwing the whole thing into a halfway decent index fund. That's the most sensible general advice when talking to a large audience of people; get them there first, which takes far less effort, and then let people who really think they can do better attempt to do so.
With index funds, you always do slightly worse than the market.
This is such a spot-on answer--thanks.
In markets like real estate and private business, I agree with everything you wrote. In a liquid, public market like publicly-traded stocks though, I'm not so sure. I don't disagree that if you devote your life to it, you could possibly find an edge - although it will likely continue to get more difficult as institutional players become ever better at exploiting (and thus removing) any inefficiencies. But even if we accept that it's possible, you would almost certainly have to accept significant volatility to do so. And even if you didn't, you would ultimately be devoting your life to winning a zero-sum game. (Similarly it is possible to become good enough at poker or (with more difficulty) blackjack to make a living from them. Even a good living, potentially. But you're going to have to weather some downswings along the way, and you won't have any consolation in the fact that you're creating something of value - as you would starting a business for instance.)
So I guess I don't disagree with anything you wrote, but I question whether it makes sense for a person to devote the majority of their energy to playing the stock market. (And I definitely agree with you that it would indeed take the majority of one's effort over the long term to have any reasonable chance of success beyond pure luck.)
Edit: I should add that I would consider some proven, passive strategies such as tilting to small and value to be exceptions. These do theoretically allow for slightly superior returns without life-consuming effort, at the likely expense of taking on some additional dimensions of risk. I personally keep a moderate small/value tilt.
So I guess I don't disagree with anything you wrote, but I question whether it makes sense for a person to devote the majority of their energy to playing the stock market. (And I definitely agree with you that it would indeed take the majority of one's effort over the long term to have any reasonable chance of success beyond pure luck.)
Edit: I should add that I would consider some proven, passive strategies such as tilting to small and value to be exceptions. These do theoretically allow for slightly superior returns without life-consuming effort, at the likely expense of taking on some additional dimensions of risk. I personally keep a moderate small/value tilt.
Hey Dave, I approved your comment over on my blog--sorry about the delay. I also wrote a response which I'll paste below:
Dave L, I concede that someone who is willing to put in the time and effort, they may become good at selecting stocks. Then again, they may not: I have friends who have spent a lot of time and effort studying individual stocks without much to show for it. And don’t even get me started on the financial press that’s there to distract and mislead investors into bad choices–yikes!
In short, I believe that a passive index fund will outperform a majority of professional active money managers, and it’s the best choice for the vast majority of people.
Furthermore, who would most people name as the greatest investor of the last 50 years? Probably Warren Buffett. Well, guess how Warren Buffett wants his money left to his wife when he dies? Buffett wants the money in an index fund (!). Here’s the article: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/w... and I’ll just quote a bit:
"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers."
So you have to ask yourself: are you smarter than Warren Buffett? Because Buffett is counting on an index fund when he dies.
Dave L, I concede that someone who is willing to put in the time and effort, they may become good at selecting stocks. Then again, they may not: I have friends who have spent a lot of time and effort studying individual stocks without much to show for it. And don’t even get me started on the financial press that’s there to distract and mislead investors into bad choices–yikes!
In short, I believe that a passive index fund will outperform a majority of professional active money managers, and it’s the best choice for the vast majority of people.
Furthermore, who would most people name as the greatest investor of the last 50 years? Probably Warren Buffett. Well, guess how Warren Buffett wants his money left to his wife when he dies? Buffett wants the money in an index fund (!). Here’s the article: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/24/w... and I’ll just quote a bit:
"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers."
So you have to ask yourself: are you smarter than Warren Buffett? Because Buffett is counting on an index fund when he dies.
I'm of the tiny, minority unpopular opinion that believes you can beat the market by picking stocks,. I have done so consistently for the past decade. Pick large cap companies with huge growth, high barriers to entry, insulated from economic trends, no debt, and high profit margins.
My favorites:
MA, V, BABA, GOOG, FB, JNJ, GILD, HD
That's not many, but these are some of the best long term investment ideas I can find. Stay away from volatile, macro-sensitive sectors like oil, materials, and retail and stick to healthcare, consumer staples, and utilities. People are getting older and wanting to live longer which is bullish for healthcare, and the web isn't going anywhere even if oil is going to $40.
Or you can try an ETF linear combination http://greyenlightenment.com/?p=1540
There are many strategies that beat the market and provide as good risk adjusted returns as an index fund .
Warren Buffett , btw, broke his on advice of avoiding tech by buying IBM, which has lagged the market considerably. most of the time Warren Buffett doesn't pick stocks in the traditional sense but instead gets special preferred shares that pay huge dividends and other perks. The performance of BRK.B is influenced more by the private companies like Geico and than stocks like Coke.
My favorites:
MA, V, BABA, GOOG, FB, JNJ, GILD, HD
That's not many, but these are some of the best long term investment ideas I can find. Stay away from volatile, macro-sensitive sectors like oil, materials, and retail and stick to healthcare, consumer staples, and utilities. People are getting older and wanting to live longer which is bullish for healthcare, and the web isn't going anywhere even if oil is going to $40.
Or you can try an ETF linear combination http://greyenlightenment.com/?p=1540
There are many strategies that beat the market and provide as good risk adjusted returns as an index fund .
Warren Buffett , btw, broke his on advice of avoiding tech by buying IBM, which has lagged the market considerably. most of the time Warren Buffett doesn't pick stocks in the traditional sense but instead gets special preferred shares that pay huge dividends and other perks. The performance of BRK.B is influenced more by the private companies like Geico and than stocks like Coke.
Good to hear that even if it's tiny, there is a small contingent who agrees. I took a portion of my savings in order to invest and have outperformed the index funds and basic allocations in my 401k and retirement accounts. I don't have a long enough track record (3 years thus far) to assume it can continue but my overall returns have consistently beaten SPY/DJI.
My sense is that investing is a skill and that you have to practice in order to get better. I've enjoyed the books of Thomas Bulkowski (http://thepatternsite.com/mybooks.html) and had fun doing it. Because it's not my primary retirement or savings it is less pressure and I try to minimize the gambling aspect instead relying on something more mechanistic.
With that said the current bull market keeps me humble; right now it's easy but if things take a turn I will try to be honest with myself and, if necessary, reallocate everything in index funds.
My sense is that investing is a skill and that you have to practice in order to get better. I've enjoyed the books of Thomas Bulkowski (http://thepatternsite.com/mybooks.html) and had fun doing it. Because it's not my primary retirement or savings it is less pressure and I try to minimize the gambling aspect instead relying on something more mechanistic.
With that said the current bull market keeps me humble; right now it's easy but if things take a turn I will try to be honest with myself and, if necessary, reallocate everything in index funds.
>I have done so consistently for the past decade.
We need a rule in financial threads that you can't boast about your investment results unless you're willing to prove it.
>Or you can try an ETF linear combination
Oh, brother. The guy back-tested 4 years of data (one of the all-time great bull runs) with a portfolio of 3 ETFs, one of which is a 3X leveraged QQQ fund. Do you not see the problems with that strategy?
This is why amateurs get crushed. Then they blame the financial world.
We need a rule in financial threads that you can't boast about your investment results unless you're willing to prove it.
>Or you can try an ETF linear combination
Oh, brother. The guy back-tested 4 years of data (one of the all-time great bull runs) with a portfolio of 3 ETFs, one of which is a 3X leveraged QQQ fund. Do you not see the problems with that strategy?
This is why amateurs get crushed. Then they blame the financial world.
Hey Matt, I've heard the Warren Buffett argument many times but it's usually misrepresented. Warren Buffett has said multiple times that if one has the skill to evaluate companies than they should pick individual companies and not choose an index fund because they will do far, far better with picking individual stocks. The problem is the vast majority of people are not skilled in evaluating companies and that's why Warren Buffett suggests them to choose a low-cost index fund.
I think though the main point of my previous comment was that many people (including posts that suggest everyone invest in only low-cost index funds and bonds) tend to underestimate the vast potential of huge returns in investing if one truly is an expert in investing.
Also, I suggest reading Common Stocks, Uncommon Profits by Philip Fisher and also Beating the Street by Peter Lynch. Both books are from legendary investors and will shed light that is different than the index fund approach/philosophy.
I think though the main point of my previous comment was that many people (including posts that suggest everyone invest in only low-cost index funds and bonds) tend to underestimate the vast potential of huge returns in investing if one truly is an expert in investing.
Also, I suggest reading Common Stocks, Uncommon Profits by Philip Fisher and also Beating the Street by Peter Lynch. Both books are from legendary investors and will shed light that is different than the index fund approach/philosophy.
> Because Buffett is counting on an index fund when he dies.
That's completely irrelevant. Nobody is going to get Buffet rich from index funds. After Buffet dies he won't be around to decide what to invest the money in so he picked index funds because they're a good conservative decision that will outperform most investors.
That does NOT mean that you can't do much, much better than that by, like Dave said, becoming an expert investor.
That's completely irrelevant. Nobody is going to get Buffet rich from index funds. After Buffet dies he won't be around to decide what to invest the money in so he picked index funds because they're a good conservative decision that will outperform most investors.
That does NOT mean that you can't do much, much better than that by, like Dave said, becoming an expert investor.
Investing 90% of a portfolio in a large-cap US index fund and 10% in short-term treasuries is not considered a "conservative" asset allocation. It's missing a lot of low-hanging fruit in terms of portfolio diversification. For example:
The suggested portfolio isn't diversified with an International stock market fund. The S&P fund isn't exposed to small-cap and mid-caps, like Vanguard's Total Stock fund. The bond component is small and has no exposure to intermediate/long-term bonds or corporate bonds.
A more conservative portfolio would be, for example:
Edit: I'm not saying that Buffett's suggested portfolio wouldn't outperform a conservative three-fund portfolio. Just that his 90/10 portfolio is very aggressive with a large-cap tilt.
The suggested portfolio isn't diversified with an International stock market fund. The S&P fund isn't exposed to small-cap and mid-caps, like Vanguard's Total Stock fund. The bond component is small and has no exposure to intermediate/long-term bonds or corporate bonds.
A more conservative portfolio would be, for example:
60% Total US Stock Market
20% Total US Bond Market
20% Total International Stock Market
Edit: I'm not saying that Buffett's suggested portfolio wouldn't outperform a conservative three-fund portfolio. Just that his 90/10 portfolio is very aggressive with a large-cap tilt.
Index funds are an extremely conservative strategy relative to trading individual stocks, many options strategies, futures, futures options, etc, etc, etc. Index funds are conservative because they aren't high risk or high reward.
Edit: Conservative is just a relative word. Sure index funds aren't conservative relative to the the things you listed, but they are to many many other strategies that Buffet (for example) used to get as rich as he is.
Edit: Conservative is just a relative word. Sure index funds aren't conservative relative to the the things you listed, but they are to many many other strategies that Buffet (for example) used to get as rich as he is.
[deleted]
Lately, even the experts have a hard time beating the SP500.
I don't know why this has been downvoted, I couldn't agree more.
most social news sites like reddit and digg consist of a clique of a dozen or so people who control the flow of discussion, and dissent is down-voted. such is life. That's why I work for myself so I call the shots.
Lesson number 1 is unequivocally wrong and contradictory with the start of the article. He says you shouldn't invest your money in single stocks, but then advocates for you to invest your money (by way of forgoing salary in favor of equity) into a start up company with (by definition) no track record of success or guaranteed future. Not to mention that when the start-up tanks (which it will do statistically) you will both lose your salary and your investments/equity will be worthless.
The assumption is that you work for the startup and have a critical enough position to earn equity, and therefore have more influence over its performance than that of a public company.
That's right. In the same way that Buffett can select a company that he believes in and then drive it forward with a strategic investment, you're trying to do the same thing with the startup that you select and drive forward.
And "startup" doesn't have to be 3-4 people. I remember trying to recruit an engineer when Google was maybe 150 people. I tried to convince the engineer that Google was doing well and it wasn't as risky as it looked, but she decided to go work for Siebel instead.
In other words, don't waste money/time/effort on things where you can't make a big difference. Find an area where you can have a lot of leverage or expertise and put your chips there.
And "startup" doesn't have to be 3-4 people. I remember trying to recruit an engineer when Google was maybe 150 people. I tried to convince the engineer that Google was doing well and it wasn't as risky as it looked, but she decided to go work for Siebel instead.
In other words, don't waste money/time/effort on things where you can't make a big difference. Find an area where you can have a lot of leverage or expertise and put your chips there.
I question the amount of influence one can actually have on the the trajectory of a start-up, even if you are an early employee. Before I wised up and joined BigUltraMegaCorp, I worked for a number of small companies, and shared offices with brilliant, hard-workers, and we all moved mountains to try to make things work, but at the end of the day, no dice. I'm pretty much convinced at this point that start-up success is almost 100% luck, and you might as well play roulette instead of trying to pick the right one to work for early on.
Hindsight being 20/20, for every "She turned down being employee number 151 at Google to work for Siebel LOL" story, there are 10,000 (maybe 100,000) "I took a chance with Pets.com and they still owe me 6 months of back pay" stories.
Hindsight being 20/20, for every "She turned down being employee number 151 at Google to work for Siebel LOL" story, there are 10,000 (maybe 100,000) "I took a chance with Pets.com and they still owe me 6 months of back pay" stories.
Pets.com had a successful IPO, seems it could have easily beat out the Seibel career.
Possibly bad specific example, although they didn't survive even a year after their IPO. The point remains though. For every start-up success story, there are thousands of failures. Who's smart enough to pick the successes ahead of time AND get a job with one of them?
Exactly. There's a big difference between investing time and money in a venture where you have some control over the outcome and unnecessarily concentrating your passive investments in a single company (or even in anything less than the broad market, given the ubiquity of low-cost index funds). And even then, assuming your startup succeeds, you wouldn't want to wait too long before diversifying some of the profits (which the article supports).
Instead of buying a bunch of lottery tickets he suggests getting a decent salary and a lottery ticket.
[deleted]
It's a mix.
When you're playing the stock market, going for single stock picks is a really bad idea. Diversification -- even modest diversification of a few companies, but preferably in different markets, hugely reduces your volatility risk. Tech is highly volatile -- investing in Microsoft, Google, Apple, Cisco, and Oracle would be nominally diversified (and there were a couple of huge winners there over the past 10-15 years), but you also incorporate a large sector risk.
When you're working for a start-up, the key is that you're moving beyond simple punch-the-clock (or per-month) income. You're not just earning a wage or salary, but there's some upside potential in the company itself. Of course, that is a tremendous risk, and the odds are good that any given company won't pay off. There are also multiple ways in which that bet is rigged, including options vesting and the fact that your employer can effectively claw back your earnings by firing you (for any or no reason, at any time) before your options vest. You've also got to have the cash to actually buy out your options.
There are other ways of building equity, one of which is to invest in your own business, venture, real estate, etc., outside of your employer. Buying investment rental property, for example.
The key though is that you want to move beyond just "I'm a wage / salary owner" status.
When you're playing the stock market, going for single stock picks is a really bad idea. Diversification -- even modest diversification of a few companies, but preferably in different markets, hugely reduces your volatility risk. Tech is highly volatile -- investing in Microsoft, Google, Apple, Cisco, and Oracle would be nominally diversified (and there were a couple of huge winners there over the past 10-15 years), but you also incorporate a large sector risk.
When you're working for a start-up, the key is that you're moving beyond simple punch-the-clock (or per-month) income. You're not just earning a wage or salary, but there's some upside potential in the company itself. Of course, that is a tremendous risk, and the odds are good that any given company won't pay off. There are also multiple ways in which that bet is rigged, including options vesting and the fact that your employer can effectively claw back your earnings by firing you (for any or no reason, at any time) before your options vest. You've also got to have the cash to actually buy out your options.
There are other ways of building equity, one of which is to invest in your own business, venture, real estate, etc., outside of your employer. Buying investment rental property, for example.
The key though is that you want to move beyond just "I'm a wage / salary owner" status.
If we all lost our money in our own startups, instead of to money-managers on Wall Street, I think the world would be a better place. My 2c
[deleted]
I noticed the same thing. One difference I came up with is that you get to buy low, long before any of the professional traders get a chance.
My thoughts exactly when I read this article.
I use Wealthfront, which allows you to park your money into an account, and depending on your level of risk, will automatically balance it across the US Stock Market, dividend stocks, emerging and foreign markets, bonds, and natural resources.
For account values over $100K, they will do tax loss harvesting for you automatically, and prevent wash sales. For over $500K account values, they will actually buy stocks for the entire S&P 500, and allow you to take tax losses on individual stocks (which you can't claim on ETFs).
I found their presentation to be quite helpful:
http://www.slideshare.net/adamnash/personal-finance-for-engi...
If you want an invite, PM me.
For account values over $100K, they will do tax loss harvesting for you automatically, and prevent wash sales. For over $500K account values, they will actually buy stocks for the entire S&P 500, and allow you to take tax losses on individual stocks (which you can't claim on ETFs).
I found their presentation to be quite helpful:
http://www.slideshare.net/adamnash/personal-finance-for-engi...
If you want an invite, PM me.
An important note on tax loss harvesting: it only defers taxes. If you'll be in a lower tax bracket in the future, that can be good; but if you'll be in a higher tax bracket when you need the money (eg house down payment), tax loss harvesting will actually cost you money, so beware.
This can be balanced against the fact that you get to invest and compound that deferred tax until you do end up paying it, possibly several years later. So instead of multiplying your account by .65 every year (assuming 35% tax rate), you only multiply it once, at the end.
If you do get a lot of money somehow, read The Challenges of Wealth, by Amy Domini. Most people who get a reasonably large chunk of cash all at once blow it, in an average of seven years. A sizable fraction of old pro athletes are broke. So are a sizable fraction of lottery winners.
As a rule of thumb, any investment where they call you is no good. If it was any good, it wouldn't need paid sales reps.
As a rule of thumb, any investment where they call you is no good. If it was any good, it wouldn't need paid sales reps.
>If it was any good, it wouldn't need paid sales reps. //
Unless they wanted to increase their profits. Just because something is good doesn't mean that sales reps can't convince more people to want it.
Unless they wanted to increase their profits. Just because something is good doesn't mean that sales reps can't convince more people to want it.
The idea is that if it was any good there would be plenty of money thrown at them without having to approach random strangers cutting them in on the action just because they're such nice people.
Of course they want to increase their profits, but that goes for any outbound sales effort. Just the fact that they try to convince you to want it doesn't mean it is good either, most likely it means you don't have the whole story.
So if you do not initiate the contact stay away from investment deals, especially when they're telephone sales calls.
Of course they want to increase their profits, but that goes for any outbound sales effort. Just the fact that they try to convince you to want it doesn't mean it is good either, most likely it means you don't have the whole story.
So if you do not initiate the contact stay away from investment deals, especially when they're telephone sales calls.
For most people, the easiest way to become financially independent is to save aggressively.
That aside, I have always invested in a small number of individual stocks, with minimal management or effort, and only moving positions between companies slowly over time. Basically, I make bets on long-term trends that I view as technologically inevitable. I don't invest in sexy companies (though some become sexy later), I invest in companies that are undervalued relative to the technology trends. That strategy is pretty trivial but it has allowed me to beat the S&P index pretty consistently over decades (famous last words) with the money I don't have a better use for e.g. savings. In fact, the margin by which I beat the S&P has been slowly improving, which I think reflects the increasing ability of tech to move the needle on the economy.
Since this is a tech site, this would seem like a repeatable strategy that anyone could and would use. But apparently people don't. Of course, I could just be really lucky.
That aside, I have always invested in a small number of individual stocks, with minimal management or effort, and only moving positions between companies slowly over time. Basically, I make bets on long-term trends that I view as technologically inevitable. I don't invest in sexy companies (though some become sexy later), I invest in companies that are undervalued relative to the technology trends. That strategy is pretty trivial but it has allowed me to beat the S&P index pretty consistently over decades (famous last words) with the money I don't have a better use for e.g. savings. In fact, the margin by which I beat the S&P has been slowly improving, which I think reflects the increasing ability of tech to move the needle on the economy.
Since this is a tech site, this would seem like a repeatable strategy that anyone could and would use. But apparently people don't. Of course, I could just be really lucky.
Based on what you've written, it doesn't appear that you've measured the performance of whatever method you're using against an appropriately risk-adjusted benchmark. For example, beating the S&P 500 over a certain time period is okay but if you're doing it with a bunch of small- or mid-cap tech stocks, it's quite possible you're not being compensated adequately for the risk you're taking.
For instance, if you're investing in companies with a market cap less than $10 billion, the risk and overall effort you're putting in is really indefensible if you aren't beating the S&P Mid-Cap Index. Which over the last twenty years - just a sample time period - outperformed the S&P 500 pretty hugely: http://finance.yahoo.com/echarts?s=%5EMID+Interactive#%7B%22...
Or do a little better and compare your performance against a real tech sector index. Do better still and use the tools of modern portfolio theory to measure your portfolio's performance.
> Of course, I could just be really lucky.
It's probably worth reading The Drunkard's Walk.
For instance, if you're investing in companies with a market cap less than $10 billion, the risk and overall effort you're putting in is really indefensible if you aren't beating the S&P Mid-Cap Index. Which over the last twenty years - just a sample time period - outperformed the S&P 500 pretty hugely: http://finance.yahoo.com/echarts?s=%5EMID+Interactive#%7B%22...
Or do a little better and compare your performance against a real tech sector index. Do better still and use the tools of modern portfolio theory to measure your portfolio's performance.
> Of course, I could just be really lucky.
It's probably worth reading The Drunkard's Walk.
I only invest in large caps, ones everyone knows, based on two criteria:
1) They are are fairly or somewhat undervalued given the conventional market view and metrics.
2) They are likely to be significant beneficiaries of large-scale technological trends that the market is oblivious to and has not priced into the stock.
Then I wait a few years for the trend to become more obvious and for the market to adjust the stock price accordingly for the new upside. My portfolio is essentially a ladder of different technology trends that take 3-4 years to mature. Occasionally one does not pan out but, while I may not make much money, I never lose much money because "good large-cap tech stock".
The only "small caps" I invest in are tech startups. But that is a different portfolio than what I am talking about here.
Since I spend my days thinking about trends in technology anyway, this whole exercise takes little additional effort. I might add or remove something from that list of stocks once a year. When I save money from my paycheck, I semi-randomly put it in a stock on that list so no thinking required.
Yes, I could do some kind of sophisticated portfolio analysis but that would defeat the goal of spending as little time on it as possible. I only check against the S&P 500 as a sanity check. My lifetime annualized return (decades) is about +2 over the S&P 500 but the last five years has been more like +4, so I can't complain. The annual return relative to the S&P 500 has actually been surprisingly steady over time, so no undue volatility.
1) They are are fairly or somewhat undervalued given the conventional market view and metrics.
2) They are likely to be significant beneficiaries of large-scale technological trends that the market is oblivious to and has not priced into the stock.
Then I wait a few years for the trend to become more obvious and for the market to adjust the stock price accordingly for the new upside. My portfolio is essentially a ladder of different technology trends that take 3-4 years to mature. Occasionally one does not pan out but, while I may not make much money, I never lose much money because "good large-cap tech stock".
The only "small caps" I invest in are tech startups. But that is a different portfolio than what I am talking about here.
Since I spend my days thinking about trends in technology anyway, this whole exercise takes little additional effort. I might add or remove something from that list of stocks once a year. When I save money from my paycheck, I semi-randomly put it in a stock on that list so no thinking required.
Yes, I could do some kind of sophisticated portfolio analysis but that would defeat the goal of spending as little time on it as possible. I only check against the S&P 500 as a sanity check. My lifetime annualized return (decades) is about +2 over the S&P 500 but the last five years has been more like +4, so I can't complain. The annual return relative to the S&P 500 has actually been surprisingly steady over time, so no undue volatility.
So, you're investing only in large cap stocks, while spending as little time as possible doing analysis, and over decades have consistently surpassed the S&P returns, with low risk and low volatility?
Forgive me if I don't believe this in the least.
Forgive me if I don't believe this in the least.
The tech sector is the third strongest sector (of 11 sectors) over the past five years: http://news.morningstar.com/stockReturns/CapWtdSectorReturns...
So what he's describing, beating the S&P 500 by a bit over that period, isn't implausible. Comparing his portfolio's performance to the S&P 500 is an obvious mistake and, more importantly, attributing his portfolio's performance to anything other than luck (good or bad) is very silly.
I didn't pull apart his post as much as I might (it's indicative of a whole range of bad ideas people have with regard to investing, like his ideas regarding sector-specific investing) but the notion that really needs to be attacked is that beating the S&P 500 or total market index can be regarded as indicative of some special ability without taking into account the portfolio's risk.
So what he's describing, beating the S&P 500 by a bit over that period, isn't implausible. Comparing his portfolio's performance to the S&P 500 is an obvious mistake and, more importantly, attributing his portfolio's performance to anything other than luck (good or bad) is very silly.
I didn't pull apart his post as much as I might (it's indicative of a whole range of bad ideas people have with regard to investing, like his ideas regarding sector-specific investing) but the notion that really needs to be attacked is that beating the S&P 500 or total market index can be regarded as indicative of some special ability without taking into account the portfolio's risk.
A lot of the investing orthodoxy is predicated on the average investor being non-observant and ignorant of almost everything important going on in the economy. I think this is both incorrect and a bit snobbish at least some of the time; many average people have sophisticated views of their line of business even if they are not sophisticated investors per se, and their domain knowledge is improperly discounted due to their lack of sophistication as investors.
I am not suggesting high-risk, short-term strategies but long-term, buy-and-hold strategies that leverage the native knowledge and intelligence of Silicon Valley engineers. I also do high-risk, short-term strategies (options and similar) based on the same domain expertise, and have done alright with those too, but I never recommend that to people.
It would be seriously odd if some random guy on Wall Street understood Silicon Valley and tech better than I do. The technology industry is not driven over the long-term by financial numbers on a spreadsheet. I've been through many tech boom-bust cycles in Silicon Valley and understand the dynamics pretty well. No special magic to this portfolio, and it has been one of the most consistent producers for me. As long as you are not betting the farm on a single company, it is difficult for this to go wrong. At least in tech, I can see the bad things telegraphed long before they materialize in the market because I understand the fundamentals. Even if Wall Street isn't paying attention.
For the poster below, my returns are consistently worse than every hedge fund that has ever wanted to hire me. I'd be a terrible hedge fund manager; I am personally more interested in return on effort than maximum possible returns. (They wanted to hire me for my theoretical skills, not my investing skills.)
I am not suggesting high-risk, short-term strategies but long-term, buy-and-hold strategies that leverage the native knowledge and intelligence of Silicon Valley engineers. I also do high-risk, short-term strategies (options and similar) based on the same domain expertise, and have done alright with those too, but I never recommend that to people.
It would be seriously odd if some random guy on Wall Street understood Silicon Valley and tech better than I do. The technology industry is not driven over the long-term by financial numbers on a spreadsheet. I've been through many tech boom-bust cycles in Silicon Valley and understand the dynamics pretty well. No special magic to this portfolio, and it has been one of the most consistent producers for me. As long as you are not betting the farm on a single company, it is difficult for this to go wrong. At least in tech, I can see the bad things telegraphed long before they materialize in the market because I understand the fundamentals. Even if Wall Street isn't paying attention.
For the poster below, my returns are consistently worse than every hedge fund that has ever wanted to hire me. I'd be a terrible hedge fund manager; I am personally more interested in return on effort than maximum possible returns. (They wanted to hire me for my theoretical skills, not my investing skills.)
>So what he's describing, beating the S&P 500 by a bit over that period, isn't implausible.
Certainly not. I suppose I take issue with having been able to do so for "decades", via only large-cap stocks.
That's implausible, to me at least. That would be all-time-great hedge fund manager type results.
Certainly not. I suppose I take issue with having been able to do so for "decades", via only large-cap stocks.
That's implausible, to me at least. That would be all-time-great hedge fund manager type results.
There could be a thousand people on hn who follow the same strategy, it's not that unlikely that it works for one of them and having it work for him makes it more likely that he writes about it.
[deleted]
Everybody in the tech world is talking about investing in index funds. Historical evidence says this is the way to go, but when everybody is doing it, it makes me question whether or not it's the right choice.
There's a possibility that the market is in another bubble right now.
There's a possibility that the market is in another bubble right now.
the trouble with index funds is you participate fully in any crash/dogs eg index funds had to hold enron to the bitter end.
some of my active funds saw the problems with the banks and got out before the crash now no index fund is ever likely to make up the difference - the active fund is now always ahead of the index
some of my active funds saw the problems with the banks and got out before the crash now no index fund is ever likely to make up the difference - the active fund is now always ahead of the index
> the active fund is now always ahead of the index
but the question is how do you select the active fund which will consistently beat the market in the future.
but the question is how do you select the active fund which will consistently beat the market in the future.
look for ones that have been around for 100 plus years and with 30-40 years of increasing dividend payments
This guy named Bernie Madoff was able to outperform the market for years and years, I hear.
>hold enron to the bitter end.
Holding Enron in a portfolio consisting of hundreds of securities will have little impact on the overall portfolio returns. That's the whole point of diversification.
Holding Enron in a portfolio consisting of hundreds of securities will have little impact on the overall portfolio returns. That's the whole point of diversification.
Made me think (as most of the lessons coincide) about the book I'm reading at the moment - 'Money: Master the Game' by Tony Robbins: http://moneymasterthegame.com/
Want to see how hard it is to predict the market? Watch this message from Tony Robbins to his followers in 2010: https://www.youtube.com/watch?v=KzREzgDoaZg
He says he believes the market may be entering a dangerous period and all but advises getting out of stocks. (Watch part 1 and part 2). If you followed his advice from 2010 until now, you've lost out big time. My point isn't that Tony Robbins was wrong, it's that it is very hard to predict the market.
He says he believes the market may be entering a dangerous period and all but advises getting out of stocks. (Watch part 1 and part 2). If you followed his advice from 2010 until now, you've lost out big time. My point isn't that Tony Robbins was wrong, it's that it is very hard to predict the market.
"Google worked out a deal with “full service” broker to give us free accounts"
That is actually really interesting. How much did this broker have to pay to get this box full of highly lucrative leads - access to a large set of newly wealthy individuals, many of which don't have experience with managing large amounts of money. A bunch of people who may be experts of technology, but probably are not experts on finance.
It seems like inviting the fox into the hen house, and telling the hens what it deal it was
That is actually really interesting. How much did this broker have to pay to get this box full of highly lucrative leads - access to a large set of newly wealthy individuals, many of which don't have experience with managing large amounts of money. A bunch of people who may be experts of technology, but probably are not experts on finance.
It seems like inviting the fox into the hen house, and telling the hens what it deal it was
[deleted]
It also seems at odds with what was said in this article, linked to here on HN a couple of weeks back:
http://www.modernluxury.com/san-francisco/story/the-best-inv...
http://www.modernluxury.com/san-francisco/story/the-best-inv...
Just to answer this thread:
Google did a fantastic job of educating employees before the IPO. They brought in a ton of smart people to bring us up to speed, emphasize the need to diversify and minimize risk, etc. Honestly, I couldn't ask for a company to do a better job of educating us.
In addition, they arranged to give us default accounts with a broker so that we could sell our shares. My decision to park some money in commercial paper was strictly my own, and I should have done more research on it first.
Google did a fantastic job of educating employees before the IPO. They brought in a ton of smart people to bring us up to speed, emphasize the need to diversify and minimize risk, etc. Honestly, I couldn't ask for a company to do a better job of educating us.
In addition, they arranged to give us default accounts with a broker so that we could sell our shares. My decision to park some money in commercial paper was strictly my own, and I should have done more research on it first.
I'm surprised he doesn't mention real estate or investing in friend/family businesses as an option.
This isn't as safe as index funds, but it is an option where you can increase your success rate by being competent. It probably has a risk profile similar to working for equity at a startup, an option only available to people who work in or around startups.
This isn't as safe as index funds, but it is an option where you can increase your success rate by being competent. It probably has a risk profile similar to working for equity at a startup, an option only available to people who work in or around startups.
He also didn't mention putting your money in TSP if you're an eligible federal employee, or talk about individual 401ks tied to an LLC to increase retirement saving limits, or why wandering the halls of Google makes you predisposed to think Cisco would be a no-way-to-lose investment. The article represents a smart but narrow dude's perspective on a very, very big world.
That said, Real Estate during the "banks won't loan anyone money and interest rates are headed up storm" and "loan money to friends/family in the Shark Tank era" don't make my "top wealth-building picks" list for 2015...
That said, Real Estate during the "banks won't loan anyone money and interest rates are headed up storm" and "loan money to friends/family in the Shark Tank era" don't make my "top wealth-building picks" list for 2015...
If you diversify enough, you can ensure a 0% return and a 0% loss. The argument for "diversification" is a recipe for safety, but not real wealth creation. Real wealth creation isn't "sticking your money in an index fund." It's a very middle class approach but as with anything, there's no such thing as a free lunch. If it takes 30 years of index funds to be able to retire, then you're doing it wrong. Investing in actual cash-flow producing assets is how you create wealth. Capital appreciation is only one part, the other part is creating cash flow. That means owning businesses, real estate and other passive income generators (IP, for example.)
Diversification is considered to be one of the only "free lunches" in finance. It can both increase your return and decrease your risk, with almost no downside.
For example, going from 100% bonds to 80% bonds and 20% stocks will significantly increase a portfolio's expected return with reduced risk. Another example is owning the Total Stock market (small and mid-caps included) rather than just the S&P 500.
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
For example, going from 100% bonds to 80% bonds and 20% stocks will significantly increase a portfolio's expected return with reduced risk. Another example is owning the Total Stock market (small and mid-caps included) rather than just the S&P 500.
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
There is an economics article I’ve brought up several times on HN. It has a lot of non obvious deep implications: “The Nature of the Firm' (1937), By Ronal Coase” It tries to answer the question of why companies exist rather than bilaterally trade of goods and services between individuals in a market. IE, if centralised economies are so bad, why are free market economies dominated by enormous companies that are internally run like a Stalinist country. Instead of Apple making all the software and hardware and the babushka doll of precursor software and hardware, couldn’t we have Apple replaced by a market?
The economics of the time (especially among proponents of centralized systems) focused a lot on “inefficiencies.” Why produce hundreds of iPad screen designs when only one is needed. Economies of scale. Coase’s answer to the question was transaction costs. The “cost” of weighing all the options and negotiating a deal to have you write a thousand lines of code to go into my bigger bundle of code.
In modern companies like Apple this is extreme. But, if you think about it in a manufacturing economy, it makes more sense.
Anyway, as I said, the more I think about it the deeper some of the concepts and implications seem to be. For example: (a) There are inefficiencies out there on the scale of East/West Germany. (b) Transactions costs are at the root of many/most major inefficiencies.
The part of this blog that got me thinking about this was “working for equity vs. salary.”
I think that for most people, the choice company they work for wass 80% chance and 20% uninformed bias. Applying for a job and interviewing is a big overhead (transaction cost) and your ability understand the company’s chances of success and the magnitude of this success isn’t very good. The fact that many people don’t know what percentage of the company their stock represents is the glaring proof. Prospective employees don’t have anywhere near the information that investors do. How much money is in the bank? What are revenues? Burn rate? Valuation at previous rounds?
The poverty of information and the fact that transaction costs make it impossible for one to consider more than the tiniest semi-random sample of opportunities is exactly the kind of dynamic I think Coase’s work implies.
The economics of the time (especially among proponents of centralized systems) focused a lot on “inefficiencies.” Why produce hundreds of iPad screen designs when only one is needed. Economies of scale. Coase’s answer to the question was transaction costs. The “cost” of weighing all the options and negotiating a deal to have you write a thousand lines of code to go into my bigger bundle of code.
In modern companies like Apple this is extreme. But, if you think about it in a manufacturing economy, it makes more sense.
Anyway, as I said, the more I think about it the deeper some of the concepts and implications seem to be. For example: (a) There are inefficiencies out there on the scale of East/West Germany. (b) Transactions costs are at the root of many/most major inefficiencies.
The part of this blog that got me thinking about this was “working for equity vs. salary.”
I think that for most people, the choice company they work for wass 80% chance and 20% uninformed bias. Applying for a job and interviewing is a big overhead (transaction cost) and your ability understand the company’s chances of success and the magnitude of this success isn’t very good. The fact that many people don’t know what percentage of the company their stock represents is the glaring proof. Prospective employees don’t have anywhere near the information that investors do. How much money is in the bank? What are revenues? Burn rate? Valuation at previous rounds?
The poverty of information and the fact that transaction costs make it impossible for one to consider more than the tiniest semi-random sample of opportunities is exactly the kind of dynamic I think Coase’s work implies.
Literally everywhere for the past years I see the advice to invest in index funds - the only question I have is what happens when a critical mass of people do just that? Wouldn't that influence the market in some way?
that's the paradox of the efficient market hypothesis - if everyone is a passive investor then who keeps the market efficient?
(...which is a common counter-argument for the markets being efficient. The reasoning behind passive investment is that, net of fees, it's difficult to out-perform the market although of course, everyone can't outperform the market because everyone collectively IS the market)
(...which is a common counter-argument for the markets being efficient. The reasoning behind passive investment is that, net of fees, it's difficult to out-perform the market although of course, everyone can't outperform the market because everyone collectively IS the market)
Companies themselves buy and sell their own stock when they believe it is under/overvalued. And there will always be people out there who believe they have an edge and can pick undervalued stocks.
These days I think in reality most people who have been into indexing for a while give themselves a bit of play money to invest in something more speculative.
These days I think in reality most people who have been into indexing for a while give themselves a bit of play money to invest in something more speculative.
And just like engineering standards, the nice thing about stock indexes is that there are so many to choose from.
The tone is far too authoritative given the narrow experience of the author. Reading an Googler's quickie blogpost investment guide isn't the path to financial independence. It's barely the bot-filled advice of /r/personalfinance with a better PageRank.
Microsoft pushed giving and 30 years later there are still people blindly pumping money into United Way. (Maybe not the best charity!) Google seems to have pushed their smart people into another half-baked set of assumptions.
I'm forcing myself NOT to get involved on this one (the solution to one person's narrow experience isn't another guy with different narrow experience ranting in the comments) but I will point out that Schwab Charitable (their DAF) has lower minimums and fees than Vanguard.
A lot of nerds spend more time researching a graphics card than a stock pick or charity. Like anything else, put the time in and you'll be rewarded over the long term.
Microsoft pushed giving and 30 years later there are still people blindly pumping money into United Way. (Maybe not the best charity!) Google seems to have pushed their smart people into another half-baked set of assumptions.
I'm forcing myself NOT to get involved on this one (the solution to one person's narrow experience isn't another guy with different narrow experience ranting in the comments) but I will point out that Schwab Charitable (their DAF) has lower minimums and fees than Vanguard.
A lot of nerds spend more time researching a graphics card than a stock pick or charity. Like anything else, put the time in and you'll be rewarded over the long term.
I agree. One of the most cringe-worthy parts of this post is the author's multiple references to bond funds. Owning bond funds is not the same thing as owning bonds and every bond investor should know the difference.
Bond prices have an inverse relationship with interest rates. Bond prices fall when interest rates rise. When you own individual bonds, you cannot lose your principal if you hold to maturity unless the issuer defaults. Most bond funds do not hold bonds to maturity, so investors in bond funds have significant exposure to interest rate risk. This is especially true today given the interest rate environment.
There are other ways to address interest rate risk with bond funds, especially if you have a longer horizon. You can buy short-term bond funds, and there are even defined maturity funds. But you don't find any mention of those in the post. It's just bonds = bond funds.
It all comes back to your comment, "put the time in and you'll be rewarded over the long term." Even seemingly simple financial advice ("buy a bond fund!") is insufficient because it requires more time and effort to execute correctly than most people are willing to put in.
Bond prices have an inverse relationship with interest rates. Bond prices fall when interest rates rise. When you own individual bonds, you cannot lose your principal if you hold to maturity unless the issuer defaults. Most bond funds do not hold bonds to maturity, so investors in bond funds have significant exposure to interest rate risk. This is especially true today given the interest rate environment.
There are other ways to address interest rate risk with bond funds, especially if you have a longer horizon. You can buy short-term bond funds, and there are even defined maturity funds. But you don't find any mention of those in the post. It's just bonds = bond funds.
It all comes back to your comment, "put the time in and you'll be rewarded over the long term." Even seemingly simple financial advice ("buy a bond fund!") is insufficient because it requires more time and effort to execute correctly than most people are willing to put in.
This is oft-cited difference between bonds and bond funds is a red herring when it comes to determining the proper investment of the two. The reason a single bond keeps you from losing your principal is because it has a declining duration, whereas bond funds generally have a fixed duration (more or less) since maturing bonds in the portfolio are usually reinvested into bonds of the same time to maturity.
You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time. The reason you would do this is if you have a known date for when you are going to need the principal. (This is the same justification you would use for buying an individual bond.) By controlling the duration via reinvestment into bond funds, you are diversifying away a majority of of the default risk (the major risk of owning bonds) while still being able to ensure your bonds are worth at least as much as your principal on a fixed date determined at the beginning of the investment.
As an aside, concern about the market price of a bond is usually a good example of focusing on the wrong thing. If a bond's price has declined because of increased default risk, this is obviously bad. But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield, so depending on your investment goals (such as having a robust inflation adjusted income stream for retirement) this may not be strictly a bad thing.
http://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fu...
You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time. The reason you would do this is if you have a known date for when you are going to need the principal. (This is the same justification you would use for buying an individual bond.) By controlling the duration via reinvestment into bond funds, you are diversifying away a majority of of the default risk (the major risk of owning bonds) while still being able to ensure your bonds are worth at least as much as your principal on a fixed date determined at the beginning of the investment.
As an aside, concern about the market price of a bond is usually a good example of focusing on the wrong thing. If a bond's price has declined because of increased default risk, this is obviously bad. But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield, so depending on your investment goals (such as having a robust inflation adjusted income stream for retirement) this may not be strictly a bad thing.
http://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fu...
> You can simulate the behavior of a single bond by rolling your investments into shorter and shorter duration bond funds over time.
As I noted, there are ways to address interest rate risk with bond funds, but you're ignoring the most important question in the context of this discussion: how many retail investors who put money into bond funds actually know about laddering strategies?
> But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield...
This is true, but you have to wait until maturity unless you're willing to sell your bond at a loss. Despite the low interest rate environment, there are still a good number of retail investors buying exposure to long-dated bonds because they don't take the time to understand their investments. Many of these investors will either have to realize potentially painful losses or wait a long time before they have the opportunity to buy new bonds with higher yields.
As I noted, there are ways to address interest rate risk with bond funds, but you're ignoring the most important question in the context of this discussion: how many retail investors who put money into bond funds actually know about laddering strategies?
> But if a bond's price has declined because of increased interest rates, this means you will be able to re-invest the coupon at a larger yield...
This is true, but you have to wait until maturity unless you're willing to sell your bond at a loss. Despite the low interest rate environment, there are still a good number of retail investors buying exposure to long-dated bonds because they don't take the time to understand their investments. Many of these investors will either have to realize potentially painful losses or wait a long time before they have the opportunity to buy new bonds with higher yields.
I don't think you read the article I linked. Reducing the effective duration on the bond fund portion of your portfolio boils down to the same thing you'd do in any healthy portfolio: yearly rebalancing.
Also, the point is not to hedge 'interest rate risk' by just buying shorter duration funds, full stop. Interest rates do not pose a risk unless you had a set date to liquidate your investment. If you are not planning on liquidating your bonds then interest rates pose no risk, they just affect the growth of the income stream.
The point is, if you are concerned about getting your principal returned, decide upon how many years down the road you need it back. That is your initial duration. To maximize your return under that constraint, buy a fund at that duration. Then yearly rebalance with other shorter duration funds (while reinvesting coupons properly) to taper the net duration down over the course of the investment period. There you go, you've just simulated a single bond but now are no longer exposed to default risk.
Again: perpetuating the idea that 'getting your principal back' is a feature only found if you buy individual bonds directly is untrue and can result in terrible investment decisions. It presents a false dilemma between a 'secure principal' and diversification. Forgoing diversification in bonds is one of the most dangerous things you can do. More than any other asset class, bonds benefit immeasurably from diversification (and probably also active management) since default risk is the major risk the investor faces.
Also, the point is not to hedge 'interest rate risk' by just buying shorter duration funds, full stop. Interest rates do not pose a risk unless you had a set date to liquidate your investment. If you are not planning on liquidating your bonds then interest rates pose no risk, they just affect the growth of the income stream.
The point is, if you are concerned about getting your principal returned, decide upon how many years down the road you need it back. That is your initial duration. To maximize your return under that constraint, buy a fund at that duration. Then yearly rebalance with other shorter duration funds (while reinvesting coupons properly) to taper the net duration down over the course of the investment period. There you go, you've just simulated a single bond but now are no longer exposed to default risk.
Again: perpetuating the idea that 'getting your principal back' is a feature only found if you buy individual bonds directly is untrue and can result in terrible investment decisions. It presents a false dilemma between a 'secure principal' and diversification. Forgoing diversification in bonds is one of the most dangerous things you can do. More than any other asset class, bonds benefit immeasurably from diversification (and probably also active management) since default risk is the major risk the investor faces.
I don't think you understand the context of this discussion. As I explicitly stated, "there are other ways to address interest rate risk with bond funds." But this isn't a technical discussion about bond buying strategies. This is a discussion about high-level financial "advice" that was woefully inadequate for the intended audience (retail investors).
To highlight this, I used the author's lack of distinction between bonds and bond funds and the most simple difference between how they function as employed by your average retail investor. You're obviously free to go off on a wild tangent detailing in more depth the way that bond funds can be used, but ironically you're only proving my original point: this is not nearly as simple as the OP's advice ("buy a bond fund!") and requires an investment of time and effort that exceeds what the vast majority of people are willing to put in.
To highlight this, I used the author's lack of distinction between bonds and bond funds and the most simple difference between how they function as employed by your average retail investor. You're obviously free to go off on a wild tangent detailing in more depth the way that bond funds can be used, but ironically you're only proving my original point: this is not nearly as simple as the OP's advice ("buy a bond fund!") and requires an investment of time and effort that exceeds what the vast majority of people are willing to put in.
I don't think bonds are really a good investment for most people. They basically have the same edge case volatility as stocks(1) without the upside. If you have a diversified portfolio the worst stock market crashes where only an issue if you used leverage.
(1)As in if the issuers fail you get nothing.
PS: Granted if bonds where still paying 10+% that would be another story, but after taxes there only slightly ahead of inflation.
(1)As in if the issuers fail you get nothing.
PS: Granted if bonds where still paying 10+% that would be another story, but after taxes there only slightly ahead of inflation.
Getting the same return on a bond investment as a stock investment is not the goal. Diversification into fixed income reduces risk (specifically volatility) which is important when you need the money at a predicted date. See this link, provided elsewhere in this thread:
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
Sorry to ding, but "I don't think bonds are a good investment for most people" is exactly the type of MattCuttsian financial generalization I'm trying to discourage in my little corner of this thread.
http://bucks.blogs.nytimes.com/2011/09/06/why-and-how-divers...
Sorry to ding, but "I don't think bonds are a good investment for most people" is exactly the type of MattCuttsian financial generalization I'm trying to discourage in my little corner of this thread.
Bonds are paying way less than stocks. If you think there a good idea feel free to defend them but consider this:
First off most methods of diversifying bonds (bond funds) add interest rate risks so there not predictable returns. Which means you can buy specific bonds. A 1 year T-Bill pays under 1% before taxes which is hardly worth the hassle for most people. To get better returns in the short term your stuck with increased risks. Sure, longer term bonds have higher returns but not all that high and your still stuck with inflation risks.
As to the classic advice of sticking 50% of your portfolio into bonds your basically getting negative risk adjusted returns. If you want liquidity just hold cash it's safer and more flexible. As to being an inflation hedge I don't see how we can have less inflation in the future.
PS: There are edge cases, but as long as interest rates are this low their fairly rare.
Edit: I do agree it's a good idea to keep some liquidity, but nothing is wrong with just holding some cash.
First off most methods of diversifying bonds (bond funds) add interest rate risks so there not predictable returns. Which means you can buy specific bonds. A 1 year T-Bill pays under 1% before taxes which is hardly worth the hassle for most people. To get better returns in the short term your stuck with increased risks. Sure, longer term bonds have higher returns but not all that high and your still stuck with inflation risks.
As to the classic advice of sticking 50% of your portfolio into bonds your basically getting negative risk adjusted returns. If you want liquidity just hold cash it's safer and more flexible. As to being an inflation hedge I don't see how we can have less inflation in the future.
PS: There are edge cases, but as long as interest rates are this low their fairly rare.
Edit: I do agree it's a good idea to keep some liquidity, but nothing is wrong with just holding some cash.
Worldwide bond market is $82 trillion. Larger than the entire stock market. Meanwhile "Retric" on HN says bonds are pointless. Hmm.
Because clearly individual small time investors make the majority of all investments... Err, wait no. Sure, there is also a huge market for elemental fluorine that does not mean it's something you want in your house.
Don't get me wrong there generally small risk adjusted net gain in any portfolio if you spend the effort picking the correct set of bonds. The problem is there a far more complex financial instrument than stocks which makes them really easy to mess up. Add to that the current returns and it's just a poor bet for most people.
Also, I note you in no way actually defended them. In there defense a condo association saving up for known long term repairs are basically an ideal bond invester.
PS: A 1/10 th percent gain on 50 billion is worth a lot of effort a 1% percent gain on 50k is not worth much.
Don't get me wrong there generally small risk adjusted net gain in any portfolio if you spend the effort picking the correct set of bonds. The problem is there a far more complex financial instrument than stocks which makes them really easy to mess up. Add to that the current returns and it's just a poor bet for most people.
Also, I note you in no way actually defended them. In there defense a condo association saving up for known long term repairs are basically an ideal bond invester.
PS: A 1/10 th percent gain on 50 billion is worth a lot of effort a 1% percent gain on 50k is not worth much.
Matt Cutts bought federal tax-free and California muni (also tax free for him) bonds. The point of my speaking up was pointing out how odd, narrow, and narrowly-specific his recommendations are. You've now added your voice to the chorus. Your recommendations are also -- narrow and a little odd.
If you're a Googler with a 3% Cali muni, that's equivalent to a taxable 6.07% yield. Beats cash.
If you're a Googler with a 3% Cali muni, that's equivalent to a taxable 6.07% yield. Beats cash.
Long term capital gains is 15% not 50+%. Also, California bonds are far from a risk free investment which is why they pay more than 1%. Remember a 5+ year bond can have negative real returns if inflation increases.
EX: People have paid 50 k for a 30 year T bill, waited 5 years and sold that for less than 50k. The important thing to remember in such situations is just because you did not sell the bond does not mean you did not lose money.
Also The tax-exempt status of municipal bonds does not extend in all instances to the alternative mininimum tax. - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat...
"Under some circumstances, a taxpayer who receives tax-exempt interest will have a greater portion of his - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat... ". So that tax free bond might not actually be tax free.
EX: People have paid 50 k for a 30 year T bill, waited 5 years and sold that for less than 50k. The important thing to remember in such situations is just because you did not sell the bond does not mean you did not lose money.
Also The tax-exempt status of municipal bonds does not extend in all instances to the alternative mininimum tax. - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat...
"Under some circumstances, a taxpayer who receives tax-exempt interest will have a greater portion of his - See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcat... ". So that tax free bond might not actually be tax free.
Muni bond interest is interest dividend income; has nothing to do with capital gains or AMT or whatever else you Googled. I lived in California and received 1099-DIV -- have you?
For a Googler making a big salary, that's 39.6% Federal plus 11% California state. Matt didn't say this in his post, you obviously don't know what you're talking about in your comment, and we've once again proven why giving investment advice on the internet is stupid.
It's either so general to be obvious, or so specific to an individual that it risks misleading people in similar (but not similar enough) scenarios. Matt did the world no favors with his post and you're not doing much with your comments.
For a Googler making a big salary, that's 39.6% Federal plus 11% California state. Matt didn't say this in his post, you obviously don't know what you're talking about in your comment, and we've once again proven why giving investment advice on the internet is stupid.
It's either so general to be obvious, or so specific to an individual that it risks misleading people in similar (but not similar enough) scenarios. Matt did the world no favors with his post and you're not doing much with your comments.
"Muni bond interest is interest dividend income" that's completely irrelevant. It's easy to get a bond whose payout is treated as capital gains and thus taxed at 15% + state tax. As to AMT, it's relevent specificly because Muni bond's can increase your taxes if your under the AMT. Muni bond's can also increase your taxes if your getting money from SS.
Anyway, your really a perfect example of someone that bought bonds without actually really understanding them or their tax implications that well. Sure, it worked out well for you, but when giving advice it's really important to understand the big picture. Not just, hey it worked for me and your probably in exactly the same situation aka let’s assume without saying that everyone lives in California.
Anyway, your really a perfect example of someone that bought bonds without actually really understanding them or their tax implications that well. Sure, it worked out well for you, but when giving advice it's really important to understand the big picture. Not just, hey it worked for me and your probably in exactly the same situation aka let’s assume without saying that everyone lives in California.
tacos, I tried to point people to Scott Adams' financial advice for people in regular situations. People who have done well in a startup are often in California, so I wanted to make sure that I mentioned the tax advantages of municipal bonds.
You've mentioned my limited experience but other than Schwab vs. Vanguard for donor-advised funds, what would you do differently? Of course people have to do their own research, but limited experience is no reason not to share information and ideas.
You've mentioned my limited experience but other than Schwab vs. Vanguard for donor-advised funds, what would you do differently? Of course people have to do their own research, but limited experience is no reason not to share information and ideas.
Matt, I appreciate you reaching out. Especially since you're a long-established contributor to the world of tech using your real name and I'm using a week-old moniker representing a Mexican food product. Some history:
I'm somewhat bedazzled by Reddit's /r/personalfinance group. It's a weird mix of debt support group, FICO score obsessive-compulsives, bots posting FAQ entries, and what appears to be 14 year olds who watch that guy who yells on the finance channel instead of doing their algebra homework repeating the same boilerplate advice over and over regardless of what the panicked, desperate OP declares is his unique financial situation and needs.
Between that, pg's insane essay yesterday on "being mean", and a discussion with a knucklehead here last week who didn't understand dilution or liquidity, your post caught me at an odd time.
My first problem with your post is that it lacks context. It goes from "gee shucks here's some dumb shit I did" to vague recommendations straight out of elementary school economics to "choose a credit union -- but not the one I chose" to suddenly talking about donor-assisted charity funds and maintaining your own mini-index fund by purchasing 75 stocks. You also use the phrase "sunshine tax" referring to weather just to make sure it's a big ol' swirl of mixed metaphors.
As someone who's only previously read your stuff when you're outlining guidelines (and teasing vague hints) of how not to piss off Googlebot, it's a little weird.
It's the same problem /r/personalfinance faces. It's not clear how old you are, where you live, what your marital/child situation is, what your health is, what your parent's health is, what your values are, or just how fucking rich you are. I don't blame you for not saying it and I don't want to know. But without that, you're a talking head spouting finance with no track record and no background, and you're saying nothing that I haven't heard from that blonde lady with the fancy haircut or the Reddit finance bot.
It's the blogger's curse, one I find myself asking whenever I start clicking around the web: why did you write this post, who the hell are you, and why should I take you seriously?
You lost your shirt on Cisco, you nearly lost it all with unsecured notes, and now you're giving me advice about securities? Um, ok. Paul Graham's doing his Dale-Carnegie-On-A-Bumper-Sticker schtick, I guess why not?
Context aside, some specifics relating to your article:
1. You are probably a bad stock picker
Should read "I am a bad stock picker." Overlaps with "just buy an index." Also, for support you link to an article written by someone who was banned for life from the securities industry.
2. No one cares about your money as much as you do
No one cares about your health as much as you do either. That doesn't mean you shouldn't visit a doctor when there's a lump in your ballsack. The world isn't melting and there are trustworthy financial organizations. Though I'd sure love to know why Google Finance sucks so hard. Financial news is a bot-filled hellhole, and given its highly keyworded nature with ticker symbols included, Google still insists on showing me blurbs from an Oregon utility (Portland General electric company) instead of GE, the 9th largest corporation on the planet. Nice scripts, dude. Reminds me of the time Google Translate autodetected Gesundheit as Spanish.
3. Wall Street is not your friend
This is a "hard won" lesson for you? How exactly were you maimed by the lack of regulation on Wall Street? You weren't even holding securities and you still made out okay. Also... capitalism? Zero sum? This is news? Sounds like rhetoric to me.
4. Think about working for equity vs. salary
Series A pinch, plenty of signs of a bubble ready to burst, interest rates ready to rise and suck the dumb money out of the Valley, energy prices in turmoil, housing still weak, and you're suggesting people dive into a startup in lieu of salary ("versus") in December, 2014 in order to retire? Let's meet back in 5 years and see how that worked out, deal?
5. Prefer index funds
Fascinating. 50/50 stock/bond split you say? And a plug for Vanguard LifeStrategy? Did you really just say "diversify but watch out for fees"in 339 words and slip a brand in? What is this, BuzzFeed? And... "Prefer"? Why? Versus what? And did you just link to that shitty site run by the guy banned for life from the securities industry again? Yes, yes you did.
6. Prefer credit unions over banks
"Wall Street is like [sic] carnival sideshow designed to separate you from your money." Really, dude? Half the credit unions in the US have less than $20 million in assets. Call me weird but I'd like my bank to be worth more money than I am. Deposit a couple six figure checks and you'll learn fast where service comes from at even the shittiest Bank of America branch. They'll give you more than lollipops. And, bonus: they can afford to make an Android app. Credit unions are great, except when they suck. Check yours, read the fine print, then consider that getting direct deposit to the bank that has ATMs everywhere might work out just the same on fees and better interest rates on savings to boot. And with an Android app!
7. Prefer Vanguard over almost anyone else
"I consider them one of the only companies on your side in the financial world." What an odd endorsement. Have you exhaustively researched the other discount brokers and their services? E-trade for individual 401ks? Schwab for low-deposit requirements across the board, extensive checking/banking options (varies by state)? Chase/Wells Fargo for HSAs? A not insane recommendation would be "use Vanguard as a baseline, they're tough to beat." And maybe keep your financial industry ethical intuition to yourself?
8. You probably don’t need a “assets under management” financial advisor
Another dubious section but CLEARLY should refer to the need for a tax advisor and/or estate planner. Two posts upthread I'm arguing with a guy who doesn't know how interest is taxed. Nobody gets this shit right and .25-.5% for a few years (especially when you're starting out) might be worth it. As for your well-earned phobia about outsiders touching your money, perhaps we could compromise? Trust but verify, perhaps? And maybe "don't get your advice on the internet" -- oops, isn't that pretty much what Scott Adams says in your first paragraph?
9. Consider municipal bonds
No discussion of risk. No discussion of how to compute effective tax rate.
--
I realize this is harsh but I just don't understand why you woke up with a belly full of turkey and decided to become Suze Ortman. If you wanted to provide anecdotes and share mistakes you made, go for it. But when you turned the corner into being "an authority" on such a huge, complex beast that affects everyone in incredibly subtle, different ways -- you lost me.
I'm somewhat bedazzled by Reddit's /r/personalfinance group. It's a weird mix of debt support group, FICO score obsessive-compulsives, bots posting FAQ entries, and what appears to be 14 year olds who watch that guy who yells on the finance channel instead of doing their algebra homework repeating the same boilerplate advice over and over regardless of what the panicked, desperate OP declares is his unique financial situation and needs.
Between that, pg's insane essay yesterday on "being mean", and a discussion with a knucklehead here last week who didn't understand dilution or liquidity, your post caught me at an odd time.
My first problem with your post is that it lacks context. It goes from "gee shucks here's some dumb shit I did" to vague recommendations straight out of elementary school economics to "choose a credit union -- but not the one I chose" to suddenly talking about donor-assisted charity funds and maintaining your own mini-index fund by purchasing 75 stocks. You also use the phrase "sunshine tax" referring to weather just to make sure it's a big ol' swirl of mixed metaphors.
As someone who's only previously read your stuff when you're outlining guidelines (and teasing vague hints) of how not to piss off Googlebot, it's a little weird.
It's the same problem /r/personalfinance faces. It's not clear how old you are, where you live, what your marital/child situation is, what your health is, what your parent's health is, what your values are, or just how fucking rich you are. I don't blame you for not saying it and I don't want to know. But without that, you're a talking head spouting finance with no track record and no background, and you're saying nothing that I haven't heard from that blonde lady with the fancy haircut or the Reddit finance bot.
It's the blogger's curse, one I find myself asking whenever I start clicking around the web: why did you write this post, who the hell are you, and why should I take you seriously?
You lost your shirt on Cisco, you nearly lost it all with unsecured notes, and now you're giving me advice about securities? Um, ok. Paul Graham's doing his Dale-Carnegie-On-A-Bumper-Sticker schtick, I guess why not?
Context aside, some specifics relating to your article:
1. You are probably a bad stock picker
Should read "I am a bad stock picker." Overlaps with "just buy an index." Also, for support you link to an article written by someone who was banned for life from the securities industry.
2. No one cares about your money as much as you do
No one cares about your health as much as you do either. That doesn't mean you shouldn't visit a doctor when there's a lump in your ballsack. The world isn't melting and there are trustworthy financial organizations. Though I'd sure love to know why Google Finance sucks so hard. Financial news is a bot-filled hellhole, and given its highly keyworded nature with ticker symbols included, Google still insists on showing me blurbs from an Oregon utility (Portland General electric company) instead of GE, the 9th largest corporation on the planet. Nice scripts, dude. Reminds me of the time Google Translate autodetected Gesundheit as Spanish.
3. Wall Street is not your friend
This is a "hard won" lesson for you? How exactly were you maimed by the lack of regulation on Wall Street? You weren't even holding securities and you still made out okay. Also... capitalism? Zero sum? This is news? Sounds like rhetoric to me.
4. Think about working for equity vs. salary
Series A pinch, plenty of signs of a bubble ready to burst, interest rates ready to rise and suck the dumb money out of the Valley, energy prices in turmoil, housing still weak, and you're suggesting people dive into a startup in lieu of salary ("versus") in December, 2014 in order to retire? Let's meet back in 5 years and see how that worked out, deal?
5. Prefer index funds
Fascinating. 50/50 stock/bond split you say? And a plug for Vanguard LifeStrategy? Did you really just say "diversify but watch out for fees"in 339 words and slip a brand in? What is this, BuzzFeed? And... "Prefer"? Why? Versus what? And did you just link to that shitty site run by the guy banned for life from the securities industry again? Yes, yes you did.
6. Prefer credit unions over banks
"Wall Street is like [sic] carnival sideshow designed to separate you from your money." Really, dude? Half the credit unions in the US have less than $20 million in assets. Call me weird but I'd like my bank to be worth more money than I am. Deposit a couple six figure checks and you'll learn fast where service comes from at even the shittiest Bank of America branch. They'll give you more than lollipops. And, bonus: they can afford to make an Android app. Credit unions are great, except when they suck. Check yours, read the fine print, then consider that getting direct deposit to the bank that has ATMs everywhere might work out just the same on fees and better interest rates on savings to boot. And with an Android app!
7. Prefer Vanguard over almost anyone else
"I consider them one of the only companies on your side in the financial world." What an odd endorsement. Have you exhaustively researched the other discount brokers and their services? E-trade for individual 401ks? Schwab for low-deposit requirements across the board, extensive checking/banking options (varies by state)? Chase/Wells Fargo for HSAs? A not insane recommendation would be "use Vanguard as a baseline, they're tough to beat." And maybe keep your financial industry ethical intuition to yourself?
8. You probably don’t need a “assets under management” financial advisor
Another dubious section but CLEARLY should refer to the need for a tax advisor and/or estate planner. Two posts upthread I'm arguing with a guy who doesn't know how interest is taxed. Nobody gets this shit right and .25-.5% for a few years (especially when you're starting out) might be worth it. As for your well-earned phobia about outsiders touching your money, perhaps we could compromise? Trust but verify, perhaps? And maybe "don't get your advice on the internet" -- oops, isn't that pretty much what Scott Adams says in your first paragraph?
9. Consider municipal bonds
No discussion of risk. No discussion of how to compute effective tax rate.
--
I realize this is harsh but I just don't understand why you woke up with a belly full of turkey and decided to become Suze Ortman. If you wanted to provide anecdotes and share mistakes you made, go for it. But when you turned the corner into being "an authority" on such a huge, complex beast that affects everyone in incredibly subtle, different ways -- you lost me.
7Figures2Commas, of course I know the difference between a single bond vs. a bond index fund. I clipped coupons off a bond my grandfather gave me as a kid.
The interest rate environment at this moment is interesting with QE coming to an end, but I'm trying to give advice that will work well long-term.
The interest rate environment at this moment is interesting with QE coming to an end, but I'm trying to give advice that will work well long-term.
You might know the difference between a bond and a bond fund, but there's nothing in your post that highlights the distinction for the readers who don't. As an example, you state:
> I’d also recommend investing in a bond index fund. Bonds tend to do well when stocks do poorly, and vice versa, so investing in both will tend to reduce your risk.
Notwithstanding the fact that "bonds tend to do well when stocks do poorly" is a vast oversimplifcation[1], "I’d also recommend investing in a bond index fund" is far too general a statement to be considered actionable advice.
This is not actionable advice either:
> But there is a simple trick to minimize your taxes: buy municipal bonds for the state where you live. For example, Vanguard offers municipal bond funds for many states, including a bond fund for California.
Vanguard offers multiple bond funds for California (there's an intermediate-term and long-term). Which one are you referring to, and why?
If you followed the title of your post ("Nine hard-won lessons about money and investing") and didn't package your own lessons as "advice" (your words, not mine) for everyone else, I think folks would have responded less critically to it. Instead, you ironically dissed financial advisors while providing "advice" far less detailed and actionable than one could expect from even the most mediocre or inexperienced of financial advisors.
[1] https://media.pimco.com/Documents/PIMCO_Quantitative_Researc...
> I’d also recommend investing in a bond index fund. Bonds tend to do well when stocks do poorly, and vice versa, so investing in both will tend to reduce your risk.
Notwithstanding the fact that "bonds tend to do well when stocks do poorly" is a vast oversimplifcation[1], "I’d also recommend investing in a bond index fund" is far too general a statement to be considered actionable advice.
This is not actionable advice either:
> But there is a simple trick to minimize your taxes: buy municipal bonds for the state where you live. For example, Vanguard offers municipal bond funds for many states, including a bond fund for California.
Vanguard offers multiple bond funds for California (there's an intermediate-term and long-term). Which one are you referring to, and why?
If you followed the title of your post ("Nine hard-won lessons about money and investing") and didn't package your own lessons as "advice" (your words, not mine) for everyone else, I think folks would have responded less critically to it. Instead, you ironically dissed financial advisors while providing "advice" far less detailed and actionable than one could expect from even the most mediocre or inexperienced of financial advisors.
[1] https://media.pimco.com/Documents/PIMCO_Quantitative_Researc...
Interesting topic and one that really resonates with me. I have always been interested in learning how to make money the way "people with money" make it.
Personally I have come to the conclusion that a few solid stocks paired with protective puts and/or call options (to make a little extra money for sideways markets) provides a decent way to generate some extra income and greatly reduces risk of losing everything from a single mistake
Most of this is standard sane advice, but the tip about "work for equity [in the next Google] instead of chasing salary": well if we all could pick stocks like that, we would not need the rest of his advice!
Regarding most of these lessons, in 2004, Google brought in experts on personal investing to educate employees heading into its initial public offering:
http://www.modernluxury.com/san-francisco/story/the-best-inv...
TL;DR: Put your money into some broad-based, low-cost index funds.
http://www.modernluxury.com/san-francisco/story/the-best-inv...
TL;DR: Put your money into some broad-based, low-cost index funds.
ah so why do the Rothschilds put a good chunk of family money in an active fund aka RIT Capital partners.
index funds are fine for some one with only a couple of grand spare - with the sort of money that comes from a good ipo you need to be a bit more sophisticated than that.
index funds are fine for some one with only a couple of grand spare - with the sort of money that comes from a good ipo you need to be a bit more sophisticated than that.
[deleted]
How many people are actually living entirely off passive income from interest, dividends, and capital gains? I feel that goal—which requires millions of dollars in investable financial assets—is only realistic for a tiny percentage of the population.
You could live quite well off only a £million or so in the UK so 2 mill in the USA will give you a nice life style - baring any catastrophic health issues
Consider also buying a bunch of bitcoins. The reward/risk ratio is too high in my opinion.
> Instead of a regular stock broker, I highly recommend Vanguard. Go with Vanguard whenever you can.
This is good advice. YMMV but my retirement fund with Vanguard has been yielding ~10% annually (VWELX).
This is good advice. YMMV but my retirement fund with Vanguard has been yielding ~10% annually (VWELX).
Matt's article (and the linked one of Scott Adams' advice) is a good and basic foundation.
Adding to the reading list, I'd very strongly recommend the following:
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification. http://www.powells.com/biblio/1-9780393340747-0
The Great Crash: 1929 by John K. Galbraith tells the story and aftermath of the biggest stock market catastrophe of the past century. It is a slim, highly readable, and incredibly informative book. Parts of it read as if it could have been written yesterday. Much of it provides a background and context on the Crash that corrected a great many misunderstandings and holes in my own knowledge. Galbraith has a dry humor and is a strong (and often disliked by insiders) critic of much of the establishment. Fans of this book are recommended to view his video series The Age of Uncertainty.
http://www.powells.com/biblio/1-9780395859995-9
http://www.powells.com/biblio/1-9780395259474-2
http://fixyt.com/watch?v=KGSID_Uyw7w
And adding to Matt's advice: have savings. The flexibility offered by "fuck you money" as Humphrey Bogart and others have noted is tremendously valuable.
Adding to the reading list, I'd very strongly recommend the following:
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification. http://www.powells.com/biblio/1-9780393340747-0
The Great Crash: 1929 by John K. Galbraith tells the story and aftermath of the biggest stock market catastrophe of the past century. It is a slim, highly readable, and incredibly informative book. Parts of it read as if it could have been written yesterday. Much of it provides a background and context on the Crash that corrected a great many misunderstandings and holes in my own knowledge. Galbraith has a dry humor and is a strong (and often disliked by insiders) critic of much of the establishment. Fans of this book are recommended to view his video series The Age of Uncertainty.
http://www.powells.com/biblio/1-9780395859995-9
http://www.powells.com/biblio/1-9780395259474-2
http://fixyt.com/watch?v=KGSID_Uyw7w
And adding to Matt's advice: have savings. The flexibility offered by "fuck you money" as Humphrey Bogart and others have noted is tremendously valuable.
Great comment! I want to emphasize this:
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification.
A Random Walk Down Wall Street is one of the best books I've ever read, and I'd only add that I think The Millionaire Next Door is also excellent. When most of us think about millionaires we think about Hollywood stars, tech company founders, and finance moguls. But most millionaires are actually normal people who spend below their means and invest what they can, usually in index funds and sometimes in a house. If they marry they don't divorce (divorce is very, very expensive and modern marriage is a high-risk endeavor).
Chances are good that most of the millionaires you know don't live like millionaires—which is why they can be millionaires!
A Random Walk Down Wall Street by Burton G. Malkiel lays out the basics of portfolio diversification.
A Random Walk Down Wall Street is one of the best books I've ever read, and I'd only add that I think The Millionaire Next Door is also excellent. When most of us think about millionaires we think about Hollywood stars, tech company founders, and finance moguls. But most millionaires are actually normal people who spend below their means and invest what they can, usually in index funds and sometimes in a house. If they marry they don't divorce (divorce is very, very expensive and modern marriage is a high-risk endeavor).
Chances are good that most of the millionaires you know don't live like millionaires—which is why they can be millionaires!
>A Random Walk Down Wall Street...
While the conclusions in this book happen to be valid for the vast majority (i.e. somewhere between 95-99% of the population should stick to index investing), people often mis-apply the conclusions in this book to suggest that certain things are impossible, and that is clearly false and misleading.
There are people who invest and trade successfully, and they are not lucky outliers any more than a brain surgeon is a lucky outlier.
I once asked a guy who made his living off of trading stocks and futures how long would it take me to learn. His answer was sobering. If I made it my full time job for 3-5 years, I could learn to be marginally profitable, and with additional years of experience I could make enough to live off of. He guessed maybe 5-10 years of 40+ hours per week dedicated to trading, and even then, if I did not study the right things I could still fail. Contrast this with the average Joe trying his hand at investing, and of course they will fail. You can't dedicate 3-5 hours per week and expect to be a competent brain surgeon.
Using the same logic in this book, we could conclude that it's impossible for anyone to start a successful business. The message should be, it's really hard and takes a lot of work, and it takes a lot of knowledge about how to run a business, and it takes a high level of competency at some skill (coding, carpentry, whatever), and you have to be competent at communicating with others, and leading others, and not have personal baggage to draw your focus away from the business, and, well, you get the idea. It's hard, and it's not for everyone, but it's not impossible.
While the conclusions in this book happen to be valid for the vast majority (i.e. somewhere between 95-99% of the population should stick to index investing), people often mis-apply the conclusions in this book to suggest that certain things are impossible, and that is clearly false and misleading.
There are people who invest and trade successfully, and they are not lucky outliers any more than a brain surgeon is a lucky outlier.
I once asked a guy who made his living off of trading stocks and futures how long would it take me to learn. His answer was sobering. If I made it my full time job for 3-5 years, I could learn to be marginally profitable, and with additional years of experience I could make enough to live off of. He guessed maybe 5-10 years of 40+ hours per week dedicated to trading, and even then, if I did not study the right things I could still fail. Contrast this with the average Joe trying his hand at investing, and of course they will fail. You can't dedicate 3-5 hours per week and expect to be a competent brain surgeon.
Using the same logic in this book, we could conclude that it's impossible for anyone to start a successful business. The message should be, it's really hard and takes a lot of work, and it takes a lot of knowledge about how to run a business, and it takes a high level of competency at some skill (coding, carpentry, whatever), and you have to be competent at communicating with others, and leading others, and not have personal baggage to draw your focus away from the business, and, well, you get the idea. It's hard, and it's not for everyone, but it's not impossible.
If you don't want to read a book on diversification, look at this picture: http://fycs.ifas.ufl.edu/younginvestor/images/unsystemic-ris...
Unsystematic risk means risks tied to holding individual stocks. Notice the x-axis. Holding more stocks (diversifying) means removing individual stock risk.
Unsystematic risk means risks tied to holding individual stocks. Notice the x-axis. Holding more stocks (diversifying) means removing individual stock risk.
Great list. Another book I've found helpful is "The Intelligent Asset Allocator" [0]. The concepts on modern portfolio theory it discusses seem to jive with Matt's article. Basically, when investing for the long term, focus more on balancing the asset classes in accordance with your risk profile than picking specific investments within an asset class. It was a very readable book for someone like me without investing experience but didn't feel like it oversimplified things.
[0] http://www.amazon.com/The-Intelligent-Asset-Allocator-Portfo...
[0] http://www.amazon.com/The-Intelligent-Asset-Allocator-Portfo...
Another great book is The Four Pillars of Investing by Bill Bernstein. If you're already sold on an index portfolio there isn't a ton of info there (although there are certainly some useful bits), but it's great for making the case.
Oh, and adding to the book recommendations: pick one of Michael Lewis's books. Lair's Poker, The Big Short, Panic, or Flash Boys.
http://www.powells.com/s3?author=lewis%2C+michael
http://www.powells.com/s3?author=lewis%2C+michael
Simple advice: just use Wealthfront and take all of this advice at once, automatically. http://wlth.fr/1fsdN6t
[deleted]
The tragic thing is that these lessons don't have to be "hard-won". I find it astonishing that a majority of even intelligent people don't do more basic research before making major decisions with something as important as their money. A few hours of research should turn up things like bogleheads.org, Bernstein, Malkiel, etc. Heck, a simple google of "site:ycombinator.com investing advice" should get you on the right track to all the advice you need in a few clicks.
What is especially hard in investing is timing. If you followed Matt's advice and put all your investments to index fund (say Vanguard Total Stock Market ETF, https://www.google.com/finance?q=NYSEARCA) in the late 2007, you would have lost almost 50% of your savings in a year. And this example is not far fetched. My startup got acquired in 2007 and I invested some of that money to the stock market in late 2007. Not all, fortunately.
This is a terrible way of looking at things, since your time horizon is far too short. If you had put your money in the market at the height and kept it in until now, you would have made money. On Oct 5, 2007, VTSAX was trading at 37.72. It is currently trading at 51.87. Moreover, what was the alternative? Cash would have lost value due to inflation. Fixed income would have gotten you less and also been vulnerable to inflation.
>I invested some of that money to the stock market in late 2007. Not all, fortunately.
Why? The inflation adjusted CAGR of the S&P from Jan 1, 2007 to Jan 1, 2014 was almost 4%.
Why? The inflation adjusted CAGR of the S&P from Jan 1, 2007 to Jan 1, 2014 was almost 4%.
Remarkably good ideas, and I tend to view most posts like this as Snake Oil.
Almost everyone should be doing most of their equity investments through a passive low cost index like Vanguard's.
Almost everyone should be doing most of their equity investments through a passive low cost index like Vanguard's.
This is the typical investment advice, and it's generally outdated and wrong to just invest in index funds based on asset classes if your goal is to diversify away volatility.
For a layman's treatment debunking this view (don't mind the title):
http://www.amazon.com/Jackass-Investing-Dont-Profit/dp/09835...
for a more academic flavor:
http://www.amazon.com/Expected-Returns-Investors-Harvesting-...
the best book on stock picking i've read:
http://www.amazon.com/Quantitative-Value-Web-Site-Practition...
For a layman's treatment debunking this view (don't mind the title):
http://www.amazon.com/Jackass-Investing-Dont-Profit/dp/09835...
for a more academic flavor:
http://www.amazon.com/Expected-Returns-Investors-Harvesting-...
the best book on stock picking i've read:
http://www.amazon.com/Quantitative-Value-Web-Site-Practition...
For a different take people might be interested in "A Mathematician Plays the Stockmarket", by John Allen Paulos (he also wrote the excellent "Innumeracy").
The book explains a bunch of mistakes he made when investing.
http://www.amazon.com/Mathematician-Plays-The-Stock-Market/d...
The book explains a bunch of mistakes he made when investing.
http://www.amazon.com/Mathematician-Plays-The-Stock-Market/d...
> You are probably a bad stock picker
You might find a stock that looks good, you check financials, fillings, read forum posts and "expert" financial blogs such as Seeking Alpha. They all concur: stock looks good, BUY! BUY! BUY!
So you buy the stock thinking you are making an informed decision only for it to crash the next day after their latest SEC filing hits the wires.
There you learn they all knew the filing was coming, so they pimped the stock hard so suckers like us bite. Corp officials, analysts, "expert" financial bloggers, even the SEC. They are all on it.
You might find a stock that looks good, you check financials, fillings, read forum posts and "expert" financial blogs such as Seeking Alpha. They all concur: stock looks good, BUY! BUY! BUY!
So you buy the stock thinking you are making an informed decision only for it to crash the next day after their latest SEC filing hits the wires.
There you learn they all knew the filing was coming, so they pimped the stock hard so suckers like us bite. Corp officials, analysts, "expert" financial bloggers, even the SEC. They are all on it.
I doubt you'll believe me, but there are a lot of 100% independent investors that are on twitter and forums as well as write in-depth blogs who consistently outperform the market and do not resort to any sort of tricks like this.
Of course, you have to find them (and I'm certainly not going to share as I have made a significant investment of time finding these people, and many of the stocks they buy are small caps), and you also have to (or should) do your own due diligence on every purchase.
Seeking Alpha specifically is mostly full of people like you describe, but there is also some honest, legitimate advice there.
Of course, you have to find them (and I'm certainly not going to share as I have made a significant investment of time finding these people, and many of the stocks they buy are small caps), and you also have to (or should) do your own due diligence on every purchase.
Seeking Alpha specifically is mostly full of people like you describe, but there is also some honest, legitimate advice there.
I am one of those people who have lived this advice and after 10 years of following some of the recommendations here, I can confirm that it works.
Here are my 5 simple rules that I followed, no lottery/IPO, just a steady single income. - Max out 401K and get company match - Max out Roth IRA for me and my wife - Invest in Vanguard S&P 500 Index Funds, some international funds and some bonds - Invested in a property in India - Lived below 35% of the salary - Always bought a used car and kept the car for as long as it runs
Results - After 10 years, I am financially independent - I am working for Google just because I enjoy working and not because I need a paycheck - My wife works as a teacher and she enjoys her job as well. She is working because she likes to and not because we need a paycheck
What was hard ? - To see friends buying expensive cars just after getting their first job and not doing the same - Friends buying > 1M$ houses while I kept renting since I like the flexibility and staying in a community - Friends going on exotic trips
I think at the end, its worth it.
Here are my 5 simple rules that I followed, no lottery/IPO, just a steady single income. - Max out 401K and get company match - Max out Roth IRA for me and my wife - Invest in Vanguard S&P 500 Index Funds, some international funds and some bonds - Invested in a property in India - Lived below 35% of the salary - Always bought a used car and kept the car for as long as it runs
Results - After 10 years, I am financially independent - I am working for Google just because I enjoy working and not because I need a paycheck - My wife works as a teacher and she enjoys her job as well. She is working because she likes to and not because we need a paycheck
What was hard ? - To see friends buying expensive cars just after getting their first job and not doing the same - Friends buying > 1M$ houses while I kept renting since I like the flexibility and staying in a community - Friends going on exotic trips
I think at the end, its worth it.
This is good advice but may also have some element of survivorship bias. If you haven't noticed, not everybody works for Google. In fact, not everybody works for a company that will match their 401(k). If you're lucky enough to be taking home a six figure salary (not to mention one that grows with bonuses as you progress) every year, maybe this advice is good. But you should consider in your advice that not everyone is taking home $xxx,xxx per year, plus bonuses, plus full company 401(k) matching and all benefits. You are very lucky that you were able to live below 35% of salary.
Still, I wonder if advice would be different for people who are making less?
Still, I wonder if advice would be different for people who are making less?
I think the mindset still applies. Surprisingly, I know people who get 6 figure salaries and yet are not financially independent.
The secret here is to start early since the expenses rise exponentially after wife and kids.
The secret here is to start early since the expenses rise exponentially after wife and kids.
For the case you're talking about, see Scott Adams' financial advice. I linked to it in my post.
They were not pleased, and felt I let them down by not being more active in investing for them.